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Dixit-Pindyck and Arrow-Fisher-Hanemann-Henry option concepts in a finance framework

  • We look at the debate on the equivalence of the Dixit-Pindyck (DP) and Arrow-Fisher-Hanemann-Henry (AFHH) option values. Casting the problem into a financial framework allows to disentangle the discussion without unnecessarily introducing new definitions. Instead, the option values can be easily translated to meaningful terms of financial option pricing. We find that the DP option value can easily be described as time-value of an American plain-vanilla option, while the AFHH option value is an exotic chooser option. Although the option values can be numerically equal, they differ for interesting, i.e. non-trivial iestment decisions and benefit-cost analyses. We find that for applied work, compared to the Dixit-Pindyck value, the AFHH concept has only limited use._x000D_

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Document Type:Working Paper
Author:Wilhelm Althammer, Georg Siegert
Chairs and Professorships:Chair of Macroeconomics
Year of Completion:2014
HHL Working Paper 139. Leipzig: HHL Leipzig Graduate School of Management, 2014