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Real option valuation with neural networks


Taudes, Alfred; Natter, Martin; Trcka, Michael (1998). Real option valuation with neural networks. International Journal of Intelligent Systems in Accounting, Finance, 7(1):43-52.

Abstract

We propose to use neural networks to value options when analytical solutions do not exist. The basic idea of this approach is to approximate the value function of a dynamic program by a neural net, where the selection of the network weights is done via simulated annealing. The main benefits of this method as compared to traditional approximation techniques are that there are no restrictions on the type of the underlying stochastic process and no limitations on the set of possible actions. This makes our approach especially attractive for valuing Real Options in flexible investments. We, therefore, demonstrate the method proposed by valuing flexibility for costly switch production between several products under various conditions.

Abstract

We propose to use neural networks to value options when analytical solutions do not exist. The basic idea of this approach is to approximate the value function of a dynamic program by a neural net, where the selection of the network weights is done via simulated annealing. The main benefits of this method as compared to traditional approximation techniques are that there are no restrictions on the type of the underlying stochastic process and no limitations on the set of possible actions. This makes our approach especially attractive for valuing Real Options in flexible investments. We, therefore, demonstrate the method proposed by valuing flexibility for costly switch production between several products under various conditions.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:1998
Deposited On:09 Dec 2016 10:49
Last Modified:08 Dec 2017 21:19
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:1055-615X
Publisher DOI:https://doi.org/10.1002/(SICI)1099-1174(199803)7:1<43::AID-ISAF128>3.0.CO;2-D
Other Identification Number:merlin-id:14217

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