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Network-based real option models

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  • Chow, Joseph Y.J.
  • Regan, Amelia C.
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    Abstract

    Building on earlier work to incorporate real option methodologies into network modeling, two models are proposed. The first is the network option design problem, which maximizes the expanded net present value of a network investment as a function of network design variables with the option to defer the committed design investment. The problem is shown to be a generalized version of the network design problem and the multi-period network design problem. A heuristic based on radial basis functions is used to solve the problem for continuous link expansion with congestion effects. The second model is a link investment deferral option set, which decomposes the network investment deferral option into individual, interacting link or project investments. This model is a project selection problem under uncertainty, where each link or project can be deferred such that the expanded net present value is maximized. The option is defined in such a way that a lower bound can be solved using an exact method based on multi-option least squares Monte Carlo simulation. Numerical tests are conducted with the classical Sioux Falls network and compared to earlier published results.

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    Bibliographic Info

    Article provided by Elsevier in its journal Transportation Research Part B: Methodological.

    Volume (Year): 45 (2011)
    Issue (Month): 4 (May)
    Pages: 682-695

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    Handle: RePEc:eee:transb:v:45:y:2011:i:4:p:682-695

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    Related research

    Keywords: Real option Project selection Network design Stochastic demand Radial basis function Multi-option least squares Monte Carlo simulation;

    References

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    1. Ukkusuri, Satish V. & Patil, Gopal, 2009. "Multi-period transportation network design under demand uncertainty," Transportation Research Part B: Methodological, Elsevier, Elsevier, vol. 43(6), pages 625-642, July.
    2. Brennan, Michael J & Schwartz, Eduardo S, 1977. "The Valuation of American Put Options," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 449-62, May.
    3. Yin, Yafeng & Madanat, Samer M. & Lu, Xiao-Yun, 2009. "Robust improvement schemes for road networks under demand uncertainty," European Journal of Operational Research, Elsevier, Elsevier, vol. 198(2), pages 470-479, October.
    4. Byung Kim & Wonkyu Kim & Byung Song, 2008. "Sequencing and scheduling highway network expansion using a discrete network design model," The Annals of Regional Science, Springer, Springer, vol. 42(3), pages 621-642, September.
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    6. Lo, Hong K. & Szeto, W.Y., 2009. "Time-dependent transport network design under cost-recovery," Transportation Research Part B: Methodological, Elsevier, Elsevier, vol. 43(1), pages 142-158, January.
    7. Trigeorgis, Lenos, 1991. "A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 26(03), pages 309-326, September.
    8. Ivan Damnjanovic & Jennifer Duthie & S. Travis Waller, 2008. "Valuation of strategic network flexibility in development of toll road projects," Construction Management and Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(9), pages 979-990.
    9. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(3), pages 229-263, September.
    10. Friesz, Terry L. & Mookherjee, Reetabrata & Yao, Tao, 2008. "Securitizing congestion: The congestion call option," Transportation Research Part B: Methodological, Elsevier, Elsevier, vol. 42(5), pages 407-437, June.
    11. Snyder, Lawrence V. & Daskin, Mark S. & Teo, Chung-Piaw, 2007. "The stochastic location model with risk pooling," European Journal of Operational Research, Elsevier, Elsevier, vol. 179(3), pages 1221-1238, June.
    12. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, Elsevier, vol. 4(3), pages 323-338, May.
    13. Michael Garvin & Charles Cheah, 2004. "Valuation techniques for infrastructure investment decisions," Construction Management and Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 22(4), pages 373-383.
    14. Saphores, Jean-Daniel M. & Boarnet, Marlon G., 2006. "Uncertainty and the timing of an urban congestion relief investment.: The no-land case," Journal of Urban Economics, Elsevier, vol. 59(2), pages 189-208, March.
    15. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt43n1k4jb, Anderson Graduate School of Management, UCLA.
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    Cited by:
    1. Allahviranloo, Mahdieh & Chow, Joseph Y.J. & Recker, Will W., 2014. "Selective vehicle routing problems under uncertainty without recourse," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 62(C), pages 68-88.
    2. Chow, Joseph Y.J. & Regan, Amelia C. & Ranaiefar, Fatemeh & Arkhipov, Dmitri I., 2011. "A network option portfolio management framework for adaptive transportation planning," Transportation Research Part A: Policy and Practice, Elsevier, vol. 45(8), pages 765-778, October.

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