The pricing of real options in discrete time models: Another story of the value of waiting to invest

This paper proposes a discrete time real options model with time-dependent and serial correlated return process for a real estate development problem with waiting options. Based on a Martingale condition, the paper claims to be able to relax many unrealistic assumptions made in the typical real option pricing methodology. Our real option model is a new one without assuming the return process as “Ito Process”, specifically, without assuming a geometric Brownian motion. We apply the model to the condominium market in Tokyo metropolitan area in the period 1971-1997 and estimate the value of waiting to invest in 1998-2007. The results partly provide realistic estimates of the parameters and show the applicability of our model.