Project Summary
This project will develop a real option model for investments made in a network as a method for addressing managerial flexibility in transportation planning. A continuous network investment deferment model is formulated with longitudinal stochastic OD flows. Each payoff is determined by the continuous network design problem. The model is a bilevel program with an upper level Bellman equation for dynamic programming and a lower level based on the continuous network design investment allocation and user-optimal route choice. Each OD demand flow evolves as an independent, discretized geometric Brownian motion. A heuristic approach based on Monte Carlo simulation and Iterative Optimization Assignment is considered, using a sampling strategy to overcome it inherent computational inefficiency. The option value is decomposed into the basic deferment option and a newly defined network option. Network exposure is expanded as an application to operational risk hedging to consider the impact of failed links on the expanded net present value. A solution for a Sioux Falls, SD network example with zero drift is compared to the stochastic demand scenarios in earlier literature as well as the standard exposure with the investment exposure.
