Acta mathematica scientia,Series B ›› 2003, Vol. 23 ›› Issue (1): 124-132.

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HETEROGENEOUS INFORMATION ARRIVAL AND R&D OPTION PRICING

 XUE Ming-Gao, LI Chu-Lin   

  1. Department of Mathematics, Huazhong University of Science and Technology, Wuhan 430074, China
  • Online:2003-01-06 Published:2003-01-06
  • Supported by:

    The work is supported by National Foundation of China (70071012).

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Abstract:

The paper models the arrival of heterogeneous information during R&D stages
as a doubly stochastic Poisson process(DSPP). The new product market introduction is
considered as a timing option(an American perpetual option). Investment in R&D can be
thought of as option on an option(a compound option). This paper derives an analytic
approximation valuation formula for the R&D option, and demonstrates that the accounts
for heterogeneous information arrival may reduce the pricing biases. This way, the gap
between real option theory and the practice of decision making with respect to investment
in R&D is diminished.

Key words: Real option, managerial flexibility, the doubly stochastic Poisson process

CLC Number: 

  • 90A12
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