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| Author: | Grenadier, S. R. |
| Title: | Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms |
| Journal: | Review of Financial Studies
2002 : FALL, VOL. 15:3, p. 691-722 |
| Index terms: | INVESTMENTS INVESTMENT INVESTMENT ANALYSIS STRATEGY COMPANIES |
| Language: | eng |
| Abstract: | Under the standard real options approach to investment under uncertainty, agents formulate optimal exercise strategies in isolation and ignore competitive interactions. However, in many real-world asset markets, exercise strategies cannot be determined separately, but must be formed as part of a strategic equilibrium. This article provides a tractable approach for deriving equilibrium investment strategies in a continuous-time Cournot-Nash framework. The impact of competition on exercise strategies is dramatic. For example, while standard real options models emphasize that a valuable "option to wait" leads firms to invest only at large positive net present values. |
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