Pricing real growth options when the underlying assets have jump diffusion processes: The case of R&D investments

Ming-Cheng Wu, Simon H. Yen

Research output: Contribution to journalArticle

16 Citations (Scopus)

Abstract

Numerous previous studies have demonstrated that research and development (R&D) investments can be evaluated by a real growth options approach. However, few studies have constructed evaluating models which consider the important R&D characteristics, including uncertainty regarding the project value, investment cost, and jump diffusion processes. The contribution of this study is not only to derive a model for evaluating R&D investments to conform to these key characteristics of R&D activities but also to build a real option pricing method that is more general than comparative important models, such as the theoretical papers of Black and Scholes (1973), Merton (1976), and Fischer (1978), and the application paper of Brach and Paxson (2001). This study also presents sensitivity analyses which illustrate the dynamic relationship between the real growth option value and the project value, investment cost, and main jump parameters. Hopefully, the results of this study can provide a useful reference for managers, and help them make better evaluations of R&D investments.

Original languageEnglish
Pages (from-to)269-276
Number of pages8
JournalR and D Management
Volume37
Issue number3
DOIs
Publication statusPublished - 2007 Jun 1

Fingerprint

Costs
Managers
Assets
Growth options
Jump-diffusion process
Pricing
Jump
Uncertainty
Option value
Real options
Evaluation
Option pricing
R&D investment

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Business, Management and Accounting(all)
  • Strategy and Management
  • Management of Technology and Innovation

Cite this

@article{874829a07b11491ca5b2f383554e7be1,
title = "Pricing real growth options when the underlying assets have jump diffusion processes: The case of R&D investments",
abstract = "Numerous previous studies have demonstrated that research and development (R&D) investments can be evaluated by a real growth options approach. However, few studies have constructed evaluating models which consider the important R&D characteristics, including uncertainty regarding the project value, investment cost, and jump diffusion processes. The contribution of this study is not only to derive a model for evaluating R&D investments to conform to these key characteristics of R&D activities but also to build a real option pricing method that is more general than comparative important models, such as the theoretical papers of Black and Scholes (1973), Merton (1976), and Fischer (1978), and the application paper of Brach and Paxson (2001). This study also presents sensitivity analyses which illustrate the dynamic relationship between the real growth option value and the project value, investment cost, and main jump parameters. Hopefully, the results of this study can provide a useful reference for managers, and help them make better evaluations of R&D investments.",
author = "Ming-Cheng Wu and Yen, {Simon H.}",
year = "2007",
month = "6",
day = "1",
doi = "10.1111/j.1467-9310.2007.00474.x",
language = "English",
volume = "37",
pages = "269--276",
journal = "R and D Management",
issn = "0033-6807",
publisher = "Wiley-Blackwell",
number = "3",

}

Pricing real growth options when the underlying assets have jump diffusion processes : The case of R&D investments. / Wu, Ming-Cheng; Yen, Simon H.

In: R and D Management, Vol. 37, No. 3, 01.06.2007, p. 269-276.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Pricing real growth options when the underlying assets have jump diffusion processes

T2 - The case of R&D investments

AU - Wu, Ming-Cheng

AU - Yen, Simon H.

PY - 2007/6/1

Y1 - 2007/6/1

N2 - Numerous previous studies have demonstrated that research and development (R&D) investments can be evaluated by a real growth options approach. However, few studies have constructed evaluating models which consider the important R&D characteristics, including uncertainty regarding the project value, investment cost, and jump diffusion processes. The contribution of this study is not only to derive a model for evaluating R&D investments to conform to these key characteristics of R&D activities but also to build a real option pricing method that is more general than comparative important models, such as the theoretical papers of Black and Scholes (1973), Merton (1976), and Fischer (1978), and the application paper of Brach and Paxson (2001). This study also presents sensitivity analyses which illustrate the dynamic relationship between the real growth option value and the project value, investment cost, and main jump parameters. Hopefully, the results of this study can provide a useful reference for managers, and help them make better evaluations of R&D investments.

AB - Numerous previous studies have demonstrated that research and development (R&D) investments can be evaluated by a real growth options approach. However, few studies have constructed evaluating models which consider the important R&D characteristics, including uncertainty regarding the project value, investment cost, and jump diffusion processes. The contribution of this study is not only to derive a model for evaluating R&D investments to conform to these key characteristics of R&D activities but also to build a real option pricing method that is more general than comparative important models, such as the theoretical papers of Black and Scholes (1973), Merton (1976), and Fischer (1978), and the application paper of Brach and Paxson (2001). This study also presents sensitivity analyses which illustrate the dynamic relationship between the real growth option value and the project value, investment cost, and main jump parameters. Hopefully, the results of this study can provide a useful reference for managers, and help them make better evaluations of R&D investments.

UR - http://www.scopus.com/inward/record.url?scp=34250007117&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=34250007117&partnerID=8YFLogxK

U2 - 10.1111/j.1467-9310.2007.00474.x

DO - 10.1111/j.1467-9310.2007.00474.x

M3 - Article

AN - SCOPUS:34250007117

VL - 37

SP - 269

EP - 276

JO - R and D Management

JF - R and D Management

SN - 0033-6807

IS - 3

ER -