Capital budgeting implications

Having identified considerable differences in the ability of stochastic processes to replicate the properties of historical price series, we do not yet know to what extent process choice also influences the valuation of capital investments. While Lo and Wang (1995) show that the choice between GBM and a mean-reverting Ornstein-Uhlenbeck process can affect financial call option values in the order of 5%, Tsekrekos et al. (2012) identify much larger variations in a more complex real option investment ranging between -40 % and 25%. However, their analysis is entirely based on comparisons between the classical mean-reverting commodity price processes of Schwartz (1997) so that an analysis of valuation implications based on the different perspective advocated in this paper is yet unavailable in academic literature.