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Valuation of R&D Investment Opportunities Using the Least-Squares Monte Carlo Method

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Giovanni Villani

    (University of Foggia, Department of Economics)

Abstract

In this paper we show the applicability of the Least Squares Monte Carlo (LSM) in valuing R&D investment opportunities. As it is well known, R&D projects are made in a phased manner, with the commencement of subsequent phase being dependent on the successful completion of the preceding phase. This is known as a sequential investment and therefore R&D projects can be considered as compound options. Moreover, R&D investments often involve considerable cost uncertainty so that they can be viewed as an exchange option, i.e. a swap of an uncertain investment cost for an uncertain gross project value. In this context, the LSM method is a powerful and flexible tool for capital budgeting decisions and for valuing R&D investments. In fact, this method provides an efficient technique to value complex real investments involving a set of interacting American-type options.

Suggested Citation

  • Giovanni Villani, 2014. "Valuation of R&D Investment Opportunities Using the Least-Squares Monte Carlo Method," Springer Books, in: Marco Corazza & Claudio Pizzi (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 289-301, Springer.
    • Handle: RePEc:spr:sprchp:978-3-319-02499-8_26
    DOI: 10.1007/978-3-319-02499-8_26
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