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Valuing investment projects under interest rate risk: empirical evidence from European firms
- Publication Year :
- 2017
-
Abstract
- none 3 no In this article, we perform an empirical investigation of the effect of the interest rate uncertainty on the valuation of investment projects. The analysis is carried out by employing a real option approach and by considering a set of firms that operate in various production sectors in the euro area. In particular, the revenues generated by the investment projects are modelled using a geometric Brownian motion, whereas the interest rate is specified as a stochastic process of Vasicek type. Moreover, using the volatility of the equity return as a proxy, the volatility of the revenues is calibrated to real firm data, while the parameters of the interest rate model are estimated by fitting the Euribor time series. To this aim, an ad hoc calibration procedure is developed which is based on the maximum likelihood principle and thus has the merit of being simple, fast and suitable for practical purposes. Our study reveals that the interest rate uncertainty reduces the valuation of investment projects. However, stochastic interest rates do not provide a substantial improvement with respect to constant interest rates, or at least the differences are not statistically significant. none Ballestra, L. V.; Pacelli, G.; Radi, D. Ballestra, L. V.; Pacelli, G.; Radi, D.
- Subjects :
- Economics and Econometrics
BlackâScholes
investment project valuation
Real option
stochastic interest rate
Blackâ Scholes
Financial economics
020209 energy
media_common.quotation_subject
02 engineering and technology
0502 economics and business
0202 electrical engineering, electronic engineering, information engineering
Economics
Econometrics
Real interest rate
Euribor
media_common
Vasicek model
050208 finance
05 social sciences
Risk-free interest rate
Real option, stochastic interest rate, investment project valuation, Black–Scholes
Settore SECS-S/06 - METODI MATEMATICI DELL'ECONOMIA E DELLE SCIENZE ATTUARIALI E FINANZIARIE
Interest rate
Interest rate risk
Black–Scholes
Short-rate model
Rendleman–Bartter model
Subjects
Details
- Language :
- English
- Database :
- OpenAIRE
- Accession number :
- edsair.doi.dedup.....de163573eb4a7d5d8cffcc7c82d2d377