Picture of Open Access badges

Discover Open Access research at Strathprints

It's International Open Access Week, 24-30 October 2016. This year's theme is "Open in Action" and is all about taking meaningful steps towards opening up research and scholarship. The Strathprints institutional repository is a digital archive of University of Strathclyde research outputs. Explore recent world leading Open Access research content by University of Strathclyde researchers and see how Strathclyde researchers are committing to putting "Open in Action".


Image: h_pampel, CC-BY

Modelling the number of customers as a birth and death process

Pinto, H. and Howell, S. and Paxson, D. (2009) Modelling the number of customers as a birth and death process. European Journal of Finance, 15 (2). pp. 105-118. ISSN 1351-847X

Full text not available in this repository. (Request a copy from the Strathclyde author)


Birth and death may be a better model than Brownian motion for many physical processes, which real options models will increasingly need to deal with. In this paper, we value a perpetual American call option, which gives the monopoly right to invest in a market in which the number of active customers (and hence the sales rate) follows a birth and death process. The problem contains a singular point, and we develop a mixed analytic/numeric method for handling this singular point, based on the method of Frobenius. The method may be useful for other cases of singular points. The birth and death model gives lower option values than the geometric Brownian motion model, except at very low volatilities, so that if a firm incorrectly assumes a geometric Brownian motion process in place of a birth and death process, it will invest too seldom and too late.