Purpose The purpose of this article is to propose a detailed methodology estimate, model and incorporate the non-constant volatility onto numerical tree scheme, evaluate real option, using quadrinomial multiplicative recombination. Design/methodology/approach This uses method with volatility, based on stochastic differential equations GARCH-diffusion type value options when stochastic. Findings...

We study a novel mechanism through which real options play prominent role in inducing the skewness of stock returns. Building on investment-based asset pricing framework, we show that firms’ to contract (expand) their businesses when productivity is low (high) can increase return skewness. Consequently, represents U-shaped function firm productivity. Furthermore, real-options effect stronger fo...