Risk Aversion and Real Options

Hugonnier, Julien; Morellec, Erwan

doi:10.2139/ssrn.422600

Cited by 8 publications

(15 citation statements)

References 7 publications

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“…This is in contrast with the findings of van den Goorbergh et al . (2003) and Hugonnier and Morellec (2007), who show that, in the common real option investment problem, risk aversion will reinforce the option effect and increase the critical value of benefits further, since the variability in the expected benefits can cause more harm under concave utility functions. The finding of risk aversion causing a countervailing force against the incentive to wait due to the option value may be important in other cases.…”

Section: Discussionmentioning

confidence: 99%

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Investment in antiviral drugs: a real options approach

2009

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SUMMARYReal options analysis is a promising approach to model investment under uncertainty. We employ this approach to value stockpiling of antiviral drugs as a precautionary measure against a possible influenza pandemic. Modifications of the real options approach to include risk attitude and deviations from expected utility are presented. We show that risk aversion counteracts the tendency to delay investment for this case of precautionary investment, which is in contrast to earlier applications of risk aversion to real options analysis. Moreover, we provide a numerical example using real world data and discuss the implications of real options analysis for health policy. Suggestions for further extensions of the model and a comparison with the expected value of information analysis are put forward.

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Section: Discussionmentioning

confidence: 99%

“…Van den Goorbergh et al . (2003) and Hugonnier and Morellec (2007) have therefore extended real options theory to take account of risk aversion. They found that risk aversion reinforced the tendency to postpone the decision implied by valuing the option of deferral.…”

Section: Analysis Under Risk Aversionmentioning

confidence: 99%

Investment in antiviral drugs: a real options approach

2009

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“…van den Goorbergh et al (2003) consider a slightly different utility function with payoff a flow of completely unhedgeable cashflows. Hugonnier and Morellec (2007) also consider the flow payoff case. Andrikopoulos (2006) argues for the application of such models to R&D because of the innovative nature of the output of R&D output and applies a binomial model based on Smith and McCardle (1998) to study the effects of agency conflicts between debt and equity holders.…”

Section: Modelmentioning

confidence: 99%

Optimal R&D investment for a risk-averse entrepreneur

Whalley

2011

Journal of Economic Dynamics and Control

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“…Thus, another contribution of this paper to the real options literature is that it explores the application scope of the real options method by combining it with the Stackelberg game against the background of international economic cooperation, which encompasses the managerial flexibility of enterprises, the interactions between the players and the investment irreversibility to provide more precise outcomes of the model. Moreover, different attitudes of the investors toward the risk also exert significant impacts on their investment decisions [19], [20]. Thus, in our paper, we consider the different risk attitudes of the two parties in making optimal decisions under the dominance of MNCs and explore the effect of the level of risk aversion on the optimal equilibrium solutions under the Stackelberg game framework.…”

Section: Introductionmentioning

confidence: 99%

The Optimal Decisions for Formation International Joint Ventures under Uncertainty

Zhang

2020

IEEE Access

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This paper develops a model in which the two parties to an international joint venture (IJV) determine the optimal cost ratio and profit share and exercise the jointly held option to enter into an IJV in uncertain situations. In our setting, the two partners make their decisions sequentially under a two-stage Stackelberg game framework, where the risk-neutral multinational company as the leader first designs the cost and equity allocation, and then the risk-averse local firm follows by choosing the optimal timing at which to exercise the joint venture option. The Stackelberg equilibrium solutions to the model are obtained by using a mix of game theory and real options. The results of the numerical analysis show that despite the multinational company's dominant position in the IJV, its equity share is not always higher than that of the local company and is closely related to the expected growth rate, risk aversion level and market volatility. The cost ratio of the foreign partner will increase correspondingly with its equity ratio unless it faces much more uncertainty in the environment. In addition, an increase in risk aversion leads to the local company sharing a higher proportion of the equity and costs of the joint venture partnership. The findings of the study can provide scientific guidance and suggestions on the transnational joint venture for overseas investment, especially in the ''One Belt and One Road'' initiative.

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Risk Aversion and Real Options

Cited by 8 publications

References 7 publications

Investment in antiviral drugs: a real options approach

Investment in antiviral drugs: a real options approach

Optimal R&D investment for a risk-averse entrepreneur

The Optimal Decisions for Formation International Joint Ventures under Uncertainty

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