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Valuing R & D Investments With A Jump-Diffusion Process

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  • L. Sereno

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.

Suggested Citation

  • L. Sereno, 2006. "Valuing R & D Investments With A Jump-Diffusion Process," Working Papers 569, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:569
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    Cited by:

    1. Garcia Fronti, Javier, 2015. "Modelo estocástico para la valuación de una inversión nanomédica [Nanomedical Stochastic Investment Valuation]," MPRA Paper 63948, University Library of Munich, Germany.

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