This paper constructs narrow bounds around the value of real options embedded in capital
budgeting decisions by applying the minimax deviations approach to real options in incomplete
markets. While it is straightforward to obtain the unique value of a real option with HARA
utility functions, the parameters of risk-aversion are often subject to misspecification and raise
concerns for practical uses. Recognizing that investors allow deviation from parameter values
related to a benchmark pricing kernel, we derive narrow bounds on a real option price. Comparison
with the approaches in the literature clarifies advantages of the minimax bounds: simple,
consistent, and efficient.
Keywords: Incomplete Markets; Real Option; Minimax Deviation