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The Value of Market Research When a Firm is Learning: Real Option Pricing and Optimal Filtering

Author

Listed:
  • N. Mayor
  • P. Schonbucher
  • P.Wilmott
  • A.E. Whalley
  • D. Epstein

Abstract

In this paper we model the value to a firm of undertaking market research into a particular product opportunity. The way in which information about the potential of the project arrives and knowledge evolves during the life of the project is modeled using the theory of optimal filtering. The value of the project and optimal entrance decision rule is then derived as the solution to a partial differential equation, using boundary conditions which reflect the structure of the project.

Suggested Citation

  • N. Mayor & P. Schonbucher & P.Wilmott & A.E. Whalley & D. Epstein, 1999. "The Value of Market Research When a Firm is Learning: Real Option Pricing and Optimal Filtering," OFRC Working Papers Series 1999mf13, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:1999mf13
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/1999mf13.pdf
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    Cited by:

    1. S H Martzoukos, 2009. "Real R&D options and optimal activation of two-dimensional random controls," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(6), pages 843-858, June.
    2. Guthrie, Graeme, 2007. "Missed Opportunities: Optimal Investment Timing When Information is Costly," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(2), pages 467-488, June.
    3. Martzoukos, Spiros H. & Zacharias, Eleftherios, 2013. "Real option games with R&D and learning spillovers," Omega, Elsevier, vol. 41(2), pages 236-249.

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