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A diffusion process model for the optimal investment strategies of an R & D project

Published online by Cambridge University Press:  14 July 2016

Dror Zuckerman
Dror Zuckerman*
Affiliation:
The Hebrew University of Jerusalem
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Abstract

In this article we examine an R & D project in which the project status changes according to a diffusion process. The decision variables include a resource expenditure strategy and a stopping policy which determines when the project should be terminated. The drift and the diffusion parameters of the project status process are assumed to be functions of the resource expenditure rate.

The terminal reward from the project is a non-decreasing function of the project status. Our purpose is to select optimal investment strategies under the discounted return criterion.

The value of the project is shown to be a solution of a second order, non-linear differential equation. Finally, we derive the optimal investment strategies for an R & D project in which the project status changes according to a non-homogeneous compound Poisson process by using diffusion approximation.

Keywords

R & D PROJECTDIFFUSION PROCESSOPTIMAL CONTROLSTATIONARY POLICIESSTOPPING TIMERESOURCE EXPENDITURE STRATEGYNON-HOMOGENEOUS POISSON PROCESS
Type
Research Papers
Information
Journal of Applied Probability , Volume 17 , Issue 3 , September 1980 , pp. 646 - 653
Copyright
Copyright © Applied Probability Trust 1980 

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References

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