Do Real Options perform better than Net Present Value? Testing in an artificial financial market
Abstract
This paper contains an investigation on a particular kind of non-linear rational expectations equilibrium in financial markets. By adopting an agent based computational finance (ACF) paradigm we will analyze whether using real options theory in financial markets is useful. Do agents who incorporate option value -when forming their trading prices - obtain higher profits? Real Options based valuation can be a valuable tool when the agents interacting in the market are homogenous in their cognitive abilities to understand and learn market dynamics, even if they are heterogenous in their ideas or ''market theories''. Speed of the learning process is another factor which crucially determines the relevance of an options based approach to valuation. If we introduce a small portion of traders acting on the basis of different strategies, we observe drastic deviations from the rational benchmark. Moreover the profitability of ROV based traders is inferior to random guessing, and to neural network based strategies.
Keywords: Agent Based Models; Artificial Markets; Classifier Systems; Economic Simulation; Market Microstructure; SWA
Journal of Artificial Societies and Social Simulation vol. 6, no. <http://jasss.soc.surrey.ac.uk/6/3/4.html>
This paper contains an investigation on a particular kind of non-linear rational expectations equilibrium in financial markets. By adopting an agent based computational finance (ACF) paradigm we will analyze whether using real options theory in financial markets is useful. Do agents who incorporate option value -when forming their trading prices - obtain higher profits? Real Options based valuation can be a valuable tool when the agents interacting in the market are homogenous in their cognitive abilities to understand and learn market dynamics, even if they are heterogenous in their ideas or ''market theories''. Speed of the learning process is another factor which crucially determines the relevance of an options based approach to valuation. If we introduce a small portion of traders acting on the basis of different strategies, we observe drastic deviations from the rational benchmark. Moreover the profitability of ROV based traders is inferior to random guessing, and to neural network based strategies.
Keywords: Agent Based Models; Artificial Markets; Classifier Systems; Economic Simulation; Market Microstructure; SWA
Journal of Artificial Societies and Social Simulation vol. 6, no. <http://jasss.soc.surrey.ac.uk/6/3/4.html>
posted by MDS at 8:23 AM
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