IDEAS home Printed from https://ideas.repec.org/a/inm/orinte/v29y1999i6p57-74.html
   My bibliography  Save this article

Valuation of R and D Projects Using Options Pricing and Decision Analysis Models

Author

Listed:
  • Robert K. Perdue

    (Westinghouse Electric Company, 1340 Beulah Road, Pittsburgh, Pennsylvania 15235-5082)

  • William J. McAllister

    (Siemens Westinghouse Power Corporation, 1310 Beulah Road, Pittsburgh, Pennsylvania 15235)

  • Peter V. King

    (Century Farm Convenience Center, 2100 Highway 86, Piedmont, South Carolina 29673)

  • Bruce G. Berkey

    (Ingersoll Rand, 98100 West Kincey Avenue, Huntersville, North Carolina 28078)

Abstract

A combination of options-pricing techniques and decision-analysis tools forms a practical process for evaluating R and D projects in a way that correctly values the impact of decision flexibility and the inevitable technical and commercial uncertainties. The options perspective leads to research-funding and project-selection decisions that can be radically different from those developed using the standard net-present-value financial rule. Decision-analysis tools simplify data acquisition. We applied the process at the Westinghouse Science and Technology Center using 13 embryonic research projects as a pilot test and subsequently applied it to the center's complete portfolio of research projects. Such an approach can be cost-effective for the type of scaled-down and decentralized research efforts that increasingly characterize US industry and can help research managers to optimize the level and composition of their research portfolios.

Suggested Citation

  • Robert K. Perdue & William J. McAllister & Peter V. King & Bruce G. Berkey, 1999. "Valuation of R and D Projects Using Options Pricing and Decision Analysis Models," Interfaces, INFORMS, vol. 29(6), pages 57-74, December.
    • Handle: RePEc:inm:orinte:v:29:y:1999:i:6:p:57-74
    DOI: 10.1287/inte.29.6.57
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/inte.29.6.57
    Download Restriction: no
    File URL: https://libkey.io/10.1287/inte.29.6.57?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Donald L. Keefer & Samuel E. Bodily, 1983. "Three-Point Approximations for Continuous Random Variables," Management Science, INFORMS, vol. 29(5), pages 595-609, May.
    2. Elizabeth Olmsted Teisberg, 1994. "An Option Valuation Analysis of Investment Choices by a Regulated Firm," Management Science, INFORMS, vol. 40(4), pages 535-548, April.
    3. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yeu-Shiang Huang & Li-Chen Liu & Jyh-Wen Ho, 2015. "Decisions on new product development under uncertainties," International Journal of Systems Science, Taylor & Francis Journals, vol. 46(6), pages 1010-1019, April.
    2. Baker, Erin & Keisler, Jeffrey M., 2011. "Cellulosic biofuels: Expert views on prospects for advancement," Energy, Elsevier, vol. 36(1), pages 595-605.
    3. Valdivia, Miguel & Galan, Jose Luis & Laffarga, Joaquina & Ramos, Juan-Luis, 2020. "A research and technology valuation model for decision analysis in the environmental and renewable energy sectors," Renewable and Sustainable Energy Reviews, Elsevier, vol. 122(C).
    4. Donald L. Keefer & Craig W. Kirkwood & James L. Corner, 2004. "Perspective on Decision Analysis Applications, 1990–2001," Decision Analysis, INFORMS, vol. 1(1), pages 4-22, March.
    5. A Morton & D Bird & A Jones & M White, 2011. "Decision conferencing for science prioritisation in the UK public sector: a dual case study," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(1), pages 50-59, January.
    6. Ozer, Muammer, 2005. "Factors which influence decision making in new product evaluation," European Journal of Operational Research, Elsevier, vol. 163(3), pages 784-801, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jin-Huei Yeh & Jying-Nan Wang & Chung-Ming Kuan, 2014. "A noise-robust estimator of volatility based on interquantile ranges," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 751-779, November.
    2. Martzoukos, Spiros H. & Trigeorgis, Lenos, 2002. "Real (investment) options with multiple sources of rare events," European Journal of Operational Research, Elsevier, vol. 136(3), pages 696-706, February.
    3. Carol Alexandra & Leonardo M. Nogueira, 2005. "Optimal Hedging and Scale Inavriance: A Taxonomy of Option Pricing Models," ICMA Centre Discussion Papers in Finance icma-dp2005-10, Henley Business School, University of Reading, revised Nov 2005.
    4. Christophe Chorro & Florian Ielpo & Benoît Sévi, 2017. "The contribution of jumps to forecasting the density of returns," Post-Print halshs-01442618, HAL.
    5. Peter Carr & Liuren Wu, 2014. "Static Hedging of Standard Options," Journal of Financial Econometrics, Oxford University Press, vol. 12(1), pages 3-46.
    6. Kathrin Glau & Ricardo Pachon & Christian Potz, 2019. "Speed-up credit exposure calculations for pricing and risk management," Papers 1912.01280, arXiv.org.
    7. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    8. Sandrine Lardic & Claire Gauthier, 2003. "Un modèle multifactoriel des spreads de crédit : estimation sur panels complets et incomplets," Économie et Prévision, Programme National Persée, vol. 159(3), pages 53-69.
    9. René Garcia & Richard Luger & Eric Renault, 2000. "Asymmetric Smiles, Leverage Effects and Structural Parameters," Working Papers 2000-57, Center for Research in Economics and Statistics.
    10. Sang Byung Seo & Jessica A. Wachter, 2019. "Option Prices in a Model with Stochastic Disaster Risk," Management Science, INFORMS, vol. 65(8), pages 3449-3469, August.
    11. John Driffill & Turalay Kenc & Martin Sola, 2013. "Real Options With Priced Regime-Switching Risk," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(05), pages 1-30.
    12. Hongzhong Zhang, 2018. "Stochastic Drawdowns," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10078, August.
    13. Carvalho, Augusto & Guimaraes, Bernardo, 2018. "State-controlled companies and political risk: Evidence from the 2014 Brazilian election," Journal of Public Economics, Elsevier, vol. 159(C), pages 66-78.
    14. Jurczenko, Emmanuel & Maillet, Bertrand & Negrea, Bogdan, 2002. "Revisited multi-moment approximate option pricing models: a general comparison (Part 1)," LSE Research Online Documents on Economics 24950, London School of Economics and Political Science, LSE Library.
    15. Viktor Stojkoski & Trifce Sandev & Lasko Basnarkov & Ljupco Kocarev & Ralf Metzler, 2020. "Generalised geometric Brownian motion: Theory and applications to option pricing," Papers 2011.00312, arXiv.org.
    16. Yeap, Claudia & Kwok, Simon S. & Choy, S. T. Boris, 2016. "A Flexible Generalised Hyperbolic Option Pricing Model and its Special Cases," Working Papers 2016-14, University of Sydney, School of Economics.
    17. Chendi Ni & Yuying Li & Peter A. Forsyth, 2023. "Neural Network Approach to Portfolio Optimization with Leverage Constraints:a Case Study on High Inflation Investment," Papers 2304.05297, arXiv.org, revised May 2023.
    18. José Valentim Machado Vicente & Jaqueline Terra Moura Marins, 2019. "A Volatility Smile-Based Uncertainty Index," Working Papers Series 502, Central Bank of Brazil, Research Department.
    19. Mancini, Cecilia, 2008. "Large deviation principle for an estimator of the diffusion coefficient in a jump-diffusion process," Statistics & Probability Letters, Elsevier, vol. 78(7), pages 869-879, May.
    20. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orinte:v:29:y:1999:i:6:p:57-74. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.