Scandinavian Working Papers in Economics

Working papers in Transport Economics,
CTS - Centre for Transport Studies Stockholm (KTH and VTI)

No 2012:17: The impact of stochastic properties of traffic demand on real option value in road projects

Niclas Krüger ()
Additional contact information
Niclas Krüger: VTI, Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden

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.

Keywords: Real option analysis; Fractional Brownian motion; Monte Carlo simulation

JEL-codes: H54; R42

33 pages, June 20, 2012

Note: Real option analysis; Fractional Brownian motion; Monte Carlo simulation

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CTS2012-17.pdf PDF-file 

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