Tarik Driouchi

Real options in management and organizational strategy:a review of decision-making and performance implications

This paper contributes to the debate on the role of real options theory in business strategy and organizational decision-making. It analyses and critiques the decision-making and performance implications of real options within the management theories of the (multinational) firm, reviews and categorizes the organizational, strategic and operational facets of real options management in large business settings. It also presents the views of scholars and practitioners regarding the incorporation and validity of real options in strategy, international management and business processes. The focus is particularly on the decision-making and performance attributes of the real options logic concerning strategic investments, governance modes and multinational operations management. These attributes are examined from both strategic and operating perspectives of decision-making in organizations, also with an overview of the empirical evidence on real options decision-making and performance.

Choquet-based European option pricing with stochastic (and fixed) strikes

This paper develops closed-form formulae for pricing European exchange options involving stochastic (and fixed) strikes under uncertainty based on the Choquet expected utility. We extend the benchmark models of Margrabe (J Financ 33:177–186, 1978) and Merton (Bell J Econ Manag Sci 4:141–183, 1973) using a modified pricing kernel and derive option “Greeks” and other option characteristics in an incomplete market with Choquet ambiguity. The Margrabe–Merton–Black–Scholes (MMBS) classical formulae are seen as special cases (under risk-neutrality) of our generalized framework under ambiguity/ignorance, suggesting that there could be multiple martingale-based option prices in the economy characterizing abnormally uncertain markets. We further show how standard option pricing properties (under risk) should be adjusted to account for investor ambiguity attitudes and heterogeneous beliefs (i.e., ambiguity aversion and seeking) and how such beliefs and attitudes can be extracted from observed option prices.

A Path Dependent Contingent-Claims Approach to Capacity Investments

This note presents a contingent-claims approach to strategic capacity planning. We develop models for capacity choice and expansion decisions in a single firm environment where investment is irreversible and demand is uncertain. These models illustrate specifically the relevance of path-dependent options analysis to planning capacity investments when the firm adopts demand tracking or average capacity strategies. It is argued that Asian/average type real options can explain hysteresis phenomena in addition to providing superior control of assets in place.

Option implied ambiguity and its information content: Evidence from the subprime crisis

This paper studies option investors’ tendency to deviate from risk-neutrality around extreme financial events. We incorporate ambiguity into Black–Scholes theory and analyze the lead–lag association between option and stock markets during 2006–2008. Our findings from the Standard and Poor’s 500 index options reveal that investors’ option implied ambiguity moderates the lead–lag relationship between implied and realized volatility. We find that implied ambiguity contains predictive realized volatility information (beyond constant and stochastic implied volatilities), and that implied volatility is a less biased predictor of realized market variance when accounting for ambiguity in option pricing. We are also able to track changing investors’ ambiguity perceptions (pessimism or optimism) prior to severe volatility events and document shifts in ambiguity aversion among put option holders in the period leading to the fall 2008 global market crash. Our results hold under multiple-priors and Choquet ambiguity specifications.

Determinants of Software Piracy Under Risk Aversion: A Model with Empirical Evidence

This paper studies the determinants of software piracy in world economies from a risk avoidance perspective. A risk aversion model for the commercialization of pirated software is developed to account for behavioral elements of risk and uncertainty avoidance among countries’ software pirates (i.e., counterfeiters and suppliers) and test empirically for the effects of country characteristics on piracy levels. Panel regression analysis is conducted to identify the determinants of software piracy using this model on a data set of 87 countries during 2007–2011. The empirical results confirm those obtained in prior research (e.g., the inverted U-shaped relationship between GDP per capita and piracy rates) but divulge that the behavioral-country component capturing the attitudes towards risk of software pirates improves the explanatory power of the statistical regressions after controlling for country performance and institutional factors. We also show that human development and good country governance reduce piracy rates. Besides providing support for our risk aversion-based piracy model and hinting at the need to consider population behavior in policy-making, these findings underline the relevance of human development and country institutions in explaining software piracy rates.

The 2008 UK Banking Crash: Evidence from Option Implied Volatility

The 2007–9 Great Recession reached its culmination point in 15 September 2008 with the demise of Lehman Brothers and the near collapse of the global financial system. A major banking crash would follow as a result of impending stock markets mayhem and abnormal credit risk contagion (Bartram and Bodnar, 2009; Longstaff, 2010). UK banking institutions in particular were severely affected by this turn of events. The oligopolistic structure of the industry and the weight of financial services in the UK economy did not facilitate recovery expost. Although losses incurred were somewhat unpredictable, the crisis itself did not come as a surprise. Early signs for a global downturn looming could be spotted in standard economic indicators as early as summer/fall 2006 (Mihm, 2008; Reinhart and Rogoff, 2008). Financial markets’ indicators would follow suit soon after with mild and sporadic warnings from index options.1 In this contribution we examine whether similar warning signals could be patterned in equity options markets (for options on individual stocks) in the UK. Specifically, we analyze the information efficiency of option IV as a predictor of (future) realized stocks downside volatility -a proxy for bank soundness and downside risk -of the four major UK banks around the 2008 global markets crash.2 Given that the event was mainly banking-driven, it is interesting to shed light on the interaction between banks’ stock prices and the volatilities implied by transactions prices for their exchange-listed options during the time leading to the crash.

Option Market Ambiguity, Excess Returns and the Equity Premium

We examine the informational efficiency of market ambiguity in predicting market excess returns and the equity premium internationally. Empirical results show a strong predictive ability of option-implied, and sentiment-based, ambiguity for U.S. stock market returns for up to three years. We also provide evidence of return predictability in eight other countries. Proxying for dispersion in ambiguity beliefs, our measures provide information in addition to standard return predictors and recent economic uncertainty indicators. We document a negative relation between ambiguity and the equity premium in line with limited market participation theory (Cao,-Wang-and-Zhang,-2005), and confirm a positive intertemporal risk-return trade-off after controlling for ambiguity.