IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Network-based real option models

Listed author(s):
  • Chow, Joseph Y.J.
  • Regan, Amelia C.
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

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

    in new window

    Handle: RePEc:eee:transb:v:45:y:2011:i:4:p:682-695
    Contact details of provider: Web page:

    Order Information: Postal:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    in new window

    1. Snyder, Lawrence V. & Daskin, Mark S. & Teo, Chung-Piaw, 2007. "The stochastic location model with risk pooling," European Journal of Operational Research, Elsevier, vol. 179(3), pages 1221-1238, June.
    2. Brennan, Michael J & Schwartz, Eduardo S, 1977. "The Valuation of American Put Options," Journal of Finance, American Finance Association, vol. 32(2), pages 449-462, May.
    3. Friesz, Terry L. & Mookherjee, Reetabrata & Yao, Tao, 2008. "Securitizing congestion: The congestion call option," Transportation Research Part B: Methodological, Elsevier, vol. 42(5), pages 407-437, June.
    4. Lo, Hong K. & Szeto, W.Y., 2009. "Time-dependent transport network design under cost-recovery," Transportation Research Part B: Methodological, Elsevier, vol. 43(1), pages 142-158, January.
    5. Ukkusuri, Satish V. & Patil, Gopal, 2009. "Multi-period transportation network design under demand uncertainty," Transportation Research Part B: Methodological, Elsevier, vol. 43(6), pages 625-642, July.
    6. Michael Garvin & Charles Cheah, 2004. "Valuation techniques for infrastructure investment decisions," Construction Management and Economics, Taylor & Francis Journals, vol. 22(4), pages 373-383.
    7. 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;Western Regional Science Association, vol. 42(3), pages 621-642, September.
    8. Yin, Yafeng & Madanat, Samer M. & Lu, Xiao-Yun, 2009. "Robust improvement schemes for road networks under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 198(2), pages 470-479, October.
    9. 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, vol. 26(9), pages 979-990.
    10. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    11. 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.
    12. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
    13. Yong Zhao & Kara Maria Kockelman, 2002. "The propagation of uncertainty through travel demand models: An exploratory analysis," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 36(1), pages 145-163.
    14. 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 qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    15. 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, vol. 26(03), pages 309-326, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:transb:v:45:y:2011:i:4:p:682-695. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.