A real options perspective on the future of the Euro

Abstract

A break-up of the Eurozone is no longer regarded as implausible. This will be a costly and irreversible decision in conditions of continuing uncertainty; therefore it is amenable to analysis in the real options framework. We do so by solving as an n-dimensional optimal stopping problem with country-specific shocks and “convergence” of member economies. We compare a complete break-up with individual country departures. In calibrated solutions for a symmetric case we find a non-negligible but small option value. Furthermore, we find a new theoretical result on the non-monotonicity of abandonment threshold with respect to volatility.