A generalized real option pricing method of R&D investments: jump diffusion and external competition. Issue 9 (3rd October 2019)

• Record Type: Journal Article
• Authors: Ao, Xiang; Yang, Ji-jun; Yang, Ben-zhang; de Bustos, M.T.
• Is Part Of: Journal of difference equations and applications. Volume 25:Issue 9/10(2019)
• Page Start: 1438
• Page End: 1453
• Publication Date: 2019-10-03
• Subjects: Real options -- R&D investments -- jump diffusion model -- external competition; 60G35 -- 60H10 -- 65C05; Difference equations -- Periodicals; 515.625
• DOI: 10.1080/10236198.2019.1661394
• Languages: English
• ISSNs: 1023-6198

Abstract

ABSTRACT: Numerous studies have assessed Research and Development (R&D) investment using the real option pricing approach. This paper proposes a more general real option pricing method that both considers the specificity of R&D investment (such as uncertainty) and the R&D investment opportunity of a business in a market environment with external competitors. Specifically, we adopt a jump diffusion model to evaluate R&D investments that incorporate the uncertainties of these activities. The model values a pioneer's R&D investment opportunity allowing the chance that competitors may enter the market and the project value may vary with time. By construction and analysis of the model, we then analyse the optimal timing to realize profit on an investment. Overall, this model should facilitate a more comprehensive evaluation for R&D investments.