Volatility Estimation of Forecasted Project Returns for Real Options Analysis
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Authors
Lewis, Neal
Spurlock, David
Issue Date
2004
Type
Article
Language
en_US
Keywords
Engineering , Engineering management , Real options , Volatility
Alternative Title
Abstract
Real Options Analysis is a technique that offers advantages over the traditional Discounted Cash Flow (DCF) approach for determining project valuation. Although options analysis uses some of the same input variables used in the DCF approach, it requires one additional variable, the volatility of the project’s forecasted returns, which is notoriously difficult to estimate reliably. There are several techniques that are used to model volatility when relevant historical data from similar projects are not available. This paper reviews the nature and potential limitations of these approaches, and provides recommendations regarding the appropriate uses of the estimates resulting from these methods.
Description
Citation
Publisher
American Society for Engineering Management