Valuing R & D Investments With A Jump-Diffusion Process

L. Sereno

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: Traditional tools based on DCF methods fail to capture the value of R&D projects because of their dependence on future events that are uncertain at the time of the initial decision. We consider a continuous-time framework where information arrives both continuously and discontinuously. This is modelled by a jump-diffusion process. This assumption better decribes the evolution of asset value due to the risky nature of many real investments. The main contribution of this paper is to derive a closed-form solution for the multicompound option to value sequential investment opportunities when the underlying asset may reasonably undergo the possibility of jumps in value.

Date: 2006
New Economics Papers: this item is included in nep-ino and nep-knm
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:569

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