Sereno, Luigi
(2006)
Valuing R & D Investments With A Jump-Diffusion Process.
Bologna:
Dipartimento di Scienze economiche DSE,
p. 13.
DOI 10.6092/unibo/amsacta/4718.
In: Quaderni - Working Paper DSE
(569).
ISSN 2282-6483.
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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 discontinu-ously. This is modelled by a jump-di¤usion 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.
Abstract