Research Article | OPEN ACCESS
Mean-Reverting Valuation of Real Options for International Railway Construction Projects
David Liu and Huang Yan
Department of Mathematical Sciences, Xi
Research Journal of Applied Sciences, Engineering and Technology 2014 24:5271-5277
Received: March ‎13, ‎2014 | Accepted: April ‎26, ‎2014 | Published: June 25, 2014
Abstract
This study proposes to employ a mean-reverting model to evaluate the real options embedded in international railway construction projects. The application of mean-reverting models has usually had the difficulty of defining suitable mean-reverting variables for evaluating railway construction projects. The innovative aspect in this research is the formation and calibration of the mean-reverting models we have proposed, in which underlying variables related to the present value of a railway project normalized by either the length of a railway track or the construction time are assumed to follow stochastic mean-reversion processes. Through an example, we show that this assumption enabled us to have evaluated the abandonment option embedded in the construction project by calibrating the parameters with Euler’s estimation and maximum likelihood estimation.
Keywords:
Investment under uncertainty, mean reverting process, railway construction projects, real option valuation,
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Competing interests
The authors have no competing interests.
Open Access Policy
This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.
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The authors have no competing interests.
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