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

17 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

All Science Journal Classification (ASJC) codes

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

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