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Network-based real option models

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

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.

Suggested Citation

  • Chow, Joseph Y.J. & Regan, Amelia C., 2011. "Network-based real option models," Transportation Research Part B: Methodological, Elsevier, vol. 45(4), pages 682-695, May.
  • Handle: RePEc:eee:transb:v:45:y:2011:i:4:p:682-695
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:transe:v:106:y:2017:i:c:p:60-77 is not listed on IDEAS
    2. Li, Zhi-Chun & Guo, Qian-Wen & Lam, William H.K. & Wong, S.C., 2015. "Transit technology investment and selection under urban population volatility: A real option perspective," Transportation Research Part B: Methodological, Elsevier, vol. 78(C), pages 318-340.
    3. Mishra, Sabyasachee & Sharma, Sushant & Khasnabis, Snehamay & Mathew, Tom V., 2013. "Preserving an aging transit fleet: An optimal resource allocation perspective based on service life and constrained budget," Transportation Research Part A: Policy and Practice, Elsevier, vol. 47(C), pages 111-123.
    4. repec:eee:transe:v:107:y:2017:i:c:p:120-140 is not listed on IDEAS
    5. 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.
    6. repec:eee:transb:v:100:y:2017:i:c:p:93-114 is not listed on IDEAS
    7. repec:eee:transb:v:102:y:2017:i:c:p:22-37 is not listed on IDEAS
    8. Sayarshad, Hamid R. & Chow, Joseph Y.J., 2015. "A scalable non-myopic dynamic dial-a-ride and pricing problem," Transportation Research Part B: Methodological, Elsevier, vol. 81(P2), pages 539-554.
    9. 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, vol. 62(C), pages 68-88.

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