Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/233268
Authors: 
Alvarez, Luis H. R.
Lempa, Jukka
Oikarinen, Elias
Year of Publication: 
2009
Series/Report no.: 
Discussion paper No. 52
Publisher: 
Aboa Centre for Economics (ACE), Turku
Abstract: 
We consider how the inter-temporal discreteness of the revenue and cost processes affect the optimal timing of a real estate investment opportunity in comparison with the investment timing strategy obtained by relying on the traditional continuous real option model. We characterize both optimal investment rules explicitly and show that the continuous model may lead to a significantly higher required rate of return than the discrete model. Hence, our results show that the use of continuous time models leads to smaller and suboptimal amount of investment. Our numerical illustrations also indicate that this difference grows as volatility increases. Consequently, even though higher volatility decelerates investment in the discrete case as well, it decelerates it less than the continuous model would predict.
Subjects: 
Real options
real estate investment timing
exchange option
JEL: 
G11
R31
C44
Document Type: 
Working Paper

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