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When are real options exercised? An empirical study of mine closings
, 1999
"... In this paper, we study a wellknown real option: the opening and closing of mines. Using a new database that tracks the annual opening and closing decisions of 285 developed North American gold mines in the period 19881997, we confirm many of the predictions from real options models. As predicted, ..."
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Cited by 23 (0 self)
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In this paper, we study a wellknown real option: the opening and closing of mines. Using a new database that tracks the annual opening and closing decisions of 285 developed North American gold mines in the period 19881997, we confirm many of the predictions from real options models. As predicted, the empirical results demonstrate that the probability that a mine is open is related to marketwide factors (including the level and volatility of the gold price and the interest rate) as well as to minespecific factors (including the mine's fixed costs, variable costs, and reserves.) These results are both statistically significant and economically material. There is strong evidence of hysteresis, which would result from nonzero opening and closing costs. Together, the data provide strong support for the real options model as a useful model to describe and predict a mine's opening and shutting decisions. In addition, we find that the decision whether to shut a mine is related to firmspecific managerial factors not normally considered within a strict real options model, most notably the profitability of other mines in the firm's portfolio and of the firm's other businesses. These relationships do not seem to be based on geographic synergies and we suspect they are an indication of capital allocation processes within these firms.
2000): “Future Possibilities in Finance Theory and Finance Practice,” HBS Working Paper 01030
"... Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It ..."
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Cited by 7 (1 self)
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Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It
Performativity in Financial Economics
"... ABSTRACT This paper describes and analyses the history of the fundamental equation of modern financial economics: the BlackScholes (or BlackScholesMerton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was ..."
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ABSTRACT This paper describes and analyses the history of the fundamental equation of modern financial economics: the BlackScholes (or BlackScholesMerton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was not rulefollowing but bricolage, creative tinkering. Second, it was, however, bricolage guided by the goal of finding a solution to the problem of option pricing analogous to existing exemplary solutions, notably the Capital Asset Pricing Model, which had successfully been applied to stock prices. Third, the central strands of work on option pricing, although all recognizably ‘orthodox ’ economics, were not unitary. There was significant theoretical disagreement amongst the pioneers of option pricing theory; this disagreement, paradoxically, turns out to be a strength of the theory. Fourth, option pricing theory has been performative. Rather than simply describing a preexisting empirical state of affairs, it altered the world, in general in a way that made itself more true.
Mergers and acquisitions, Black–Scholes formula, success probability, fallback
, 2009
"... When a cash merger is announced but not completed, there are two main sources of uncertainty related to the target company: the probability of success and the price conditional on the deal failing. We propose an arbitragefree option pricing formula that focuses on these sources of uncertainty. We t ..."
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When a cash merger is announced but not completed, there are two main sources of uncertainty related to the target company: the probability of success and the price conditional on the deal failing. We propose an arbitragefree option pricing formula that focuses on these sources of uncertainty. We test our formula in a study of all cash mergers between 1996 and 2008 which have sufficiently liquid options traded on the target company. The estimated success probability is a good predictor of the deal outcome. Our option formula for cash mergers does significantly better than the Black– Scholes formula and produces a volatility smile close to the one observed in practice. In particular, we provide an explanation for the kink in the volatility smile and show that the kink increases with the probability of deal success.
TEACHING NOTE 9902: DERIVATION AND INTERPRETATION OF THE BLACKSCHOLES MODEL
, 2011
"... From the basic principles associated with the standard stochastic process used in modeling asset prices and an understanding of Itô’s Lemma, we can now derive the BlackScholes model for pricing European options. Let the asset price follow the standard lognormal diffusion process given by the stocha ..."
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From the basic principles associated with the standard stochastic process used in modeling asset prices and an understanding of Itô’s Lemma, we can now derive the BlackScholes model for pricing European options. Let the asset price follow the standard lognormal diffusion process given by the stochastic differential equation known as Geometric Brownian Motion, dS