Modelling and Computation for the Valuation of Two-Period $R\&D$ Projects by Option Games

Modelling and Computation for the Valuation of Two-Period $R\&D$ Projects by Option Games

Year:    2019

Author:    Jiayue Zhang, Junlin Wang, Xinyu Wang

Advances in Applied Mathematics and Mechanics, Vol. 11 (2019), Iss. 4 : pp. 957–979

Abstract

In $R\&D$ investment projects, the value and the flexibility of investments are investigated by real option models, while the competition among the investors are mainly analyzed by the game theory. In this paper, we propose an option game model to analyze the case in which two firms invest the same project during a period of time. The firm taking the initiative, the leader, achieves more market shares, whereas the follower gains some investment information from the leader. We apply the fitted finite volume method and the power penalty method in order to get the solution of the option game model. Several managerial results including the payoffs and the effects of parameters are also discussed. Finally, by comparing the compound American option with the European one, we find the former more suitable for the analysis of $R\&D$ investment projects.

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Journal Article Details

Publisher Name:    Global Science Press

Language:    English

DOI:    https://doi.org/10.4208/aamm.OA-2018-0215

Advances in Applied Mathematics and Mechanics, Vol. 11 (2019), Iss. 4 : pp. 957–979

Published online:    2019-01

AMS Subject Headings:    Global Science Press

Copyright:    COPYRIGHT: © Global Science Press

Pages:    23

Keywords:    $R\&D$ investment project option game compound American option fitted finite volume method.

Author Details

Jiayue Zhang

Junlin Wang

Xinyu Wang