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Assessing Economic Policies Using the Real Options Methodology - 3 ECTS
Irreversible effects do play an important role in private as well as public decision making. The basis for the Precautionary Principle, an important principle in environmental policy, is uncertainty about irreversible costs of particular actions (e.g. the release of GMOs).
Registration
This course will address the issue of irreversibility from an economic point of view. Different approaches dealing with irreversibilities have emerged in the economic literature. The two most prominent once are the quasi option and real option value theory. Application of both approaches requires technical skills most students find difficult.
The objective of the course is to introduce the origins of the quasi option value and real option values, to teach the methods most commonly used (discrete methods such as decision trees; continuous time, continuous state models using stochastic processes; Itó calculus), and to discuss and practice various applications including non-renewable resource use, technology adoption, climate change, forestry, and food- and bio-safety.
The course will include two parts. One week of lectures and exercises with assignments and a course paper. For passing the course students need to participate in lectures and exercises (min. 90%) and submit the course paper within six month after the course.
Learning outcomes
After successful completion participants are expected to be able to:
- know the economic implications and relevance of the irreversibility effect
- understand economic papers that apply real option models
- apply discrete state models for decision under uncertainty and irreversibility
- know the steps from discrete time, discrete state to continuous time, continuous stat models
- develop real option models and anlyse the results using numerical simulation methods
Activites
- Lectures on the skills needed (25%)
- Practicals deepening the skills obtained (25%)
- Course paper applying the skills obtained (50%)
Assessment
Course paper between 10 and 20 pages.
Assumed prior knowledge
Good micro-economic knowledge and in particular calculus (derivatives, integrals), basic knowledge in stochastic processes and differential equations is an advantage.
Target group
PhD candidates. Min. 10 participants, max. 25 participants.
Schedule
| Monday | Tuesday | Wednesday | Thursday | Friday | |
|---|---|---|---|---|---|
| 10.00-11.30 | Introduction - course overview - assignments - grading - review discounting and integrals (Justus Wesseler) | Comparing Financial, Quasi, and Real Option Values (AF, Henry, DP) (Justus Wesseler) | McDonald and Siegel Models (Justus Wesseler) | Entry, Exit, and Hysteresis. Discrete State. (Justus Wesseler) | Numerical Solutions. (Kutay Cingiz) |
| 11.30-11.45 | Coffee break | Coffee break | Coffee break | Coffee break | Coffee break |
| 11.45-13.15 | Pricing of Financial Options: discrete time, discrete state, including exercises (Justus Wesseler) | Additional Applications and Practicals (Kutay Cingiz, Justus Wesseler) | Application and Exercises McDonald and Siegel Model. Comparative Static Exercises. (Kutay Cingiz) | Entry, Exit, and Hysteresis. Discrete State. Exercises (Justus Wesseler) | Exercises: Numerical Solutions. (Kutay Cingiz) |
| 13.15-14.30 | Lunch break | Lunch break | Lunch break | Lunch break | Lunch break |
| 14.30-16.00 | Quasi and Real Option Value (Justus Wesseler) | Continuous Time Continuous State Stochastic process; Itô-calculus (Justus Wesseler) | Applications and Exercises: McDonald and Siegel Models - Sugar Beet Paper (Kutay Cingiz, Justus Wesseler) | Entry, Exit, and Hysteresis. Continuous time and state. (Justus Wesseler) | Applications and Exercises (Kutay Cingiz) |
| 16.00-16.30 | Coffee break | Coffee break | Coffee break | Coffee break | Coffee break |
| 16.30-18.00 | Exercises: discrete time and state, Arrow/Fisher example, (Kutay Cingiz, Justus Wesseler) | Exercises practicing Itô-process; Simulating Brownian motion, estimating processes (Kutay Cingiz) | Applications and Exercises: McDonald and Siegel Models - Sugar Beet Paper, (Kutay Cingiz, Justus Wesseler) | Exercises: Entry, Exit, and Hysteresis. Continuous time and state. (Cingiz Kutay) | Applications and Exercises (Kutay Cingiz) and course evaluation |
| WGS PhD's with an approved TSP | € 250 |
| Other PhD's, postdocs and academic staff | € 500 |
| All others | € 750 |
Cancellation conditions
The participants can cancel their registration free of charge 1 month before the course starts. A cancellation fee of 100% applies if a participant cancels his/her registration less than 1 month prior to the start of the course.
The organisers have the right to cancel the course no later than one month before the planned course start date in the case that the number of registrations does not reach the minimum.
The participants will be notified of any changes at their e-mail addresses.