The impact of stochastic properties of traffic demand on real option value in road projects Krüger, Niclas
Series: Working papers in transport economics ; 2012:17Publication details: Stockholm Centre for Transport Studies Stockholm, 2012; Swedish National Road & Transport Research Institute [VTI], ; KTH Royal Institute of Technology, ; S-WoPEc, Scandinavian Working Papers in Economics, Description: 33 sSubject(s): Online resources: Abstract: In this paper we examine the stochastic properties that long term aggregate traffic demand exhibits. Based on the results of the time series analysis, we examine how fractionally integrated processes affect real option valuation in road projects. We conclude that the long memory property we find in long term aggregate traffic demand using Swedish data, implying that a shock in demand has persistent positive effects on future demand, leads to higher option values in road projects compared to the values from a standard model using geometric Brownian motion.In this paper we examine the stochastic properties that long term aggregate traffic demand exhibits. Based on the results of the time series analysis, we examine how fractionally integrated processes affect real option valuation in road projects. We conclude that the long memory property we find in long term aggregate traffic demand using Swedish data, implying that a shock in demand has persistent positive effects on future demand, leads to higher option values in road projects compared to the values from a standard model using geometric Brownian motion.