The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling /
Kellogg, Ryan.
The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling / Ryan Kellogg. - Cambridge, Mass. National Bureau of Economic Research 2010. - 1 online resource: illustrations (black and white); - NBER working paper series no. w16541 . - Working Paper Series (National Bureau of Economic Research) no. w16541. .
November 2010.
Despite widespread application of real options theory in the literature, the extent to which firms actually delay irreversible investments following an increase in the uncertainty of their environment is not empirically well-known. This paper estimates firms' responsiveness to changes in uncertainty using detailed data on oil well drilling in Texas and expectations of future oil price volatility derived from the NYMEX futures options market. Using a dynamic model of firms' investment problem, I find that oil companies respond to changes in expected price volatility by adjusting their drilling activity by a magnitude consistent with the optimal response prescribed by theory.
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Mode of access: World Wide Web.
The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling / Ryan Kellogg. - Cambridge, Mass. National Bureau of Economic Research 2010. - 1 online resource: illustrations (black and white); - NBER working paper series no. w16541 . - Working Paper Series (National Bureau of Economic Research) no. w16541. .
November 2010.
Despite widespread application of real options theory in the literature, the extent to which firms actually delay irreversible investments following an increase in the uncertainty of their environment is not empirically well-known. This paper estimates firms' responsiveness to changes in uncertainty using detailed data on oil well drilling in Texas and expectations of future oil price volatility derived from the NYMEX futures options market. Using a dynamic model of firms' investment problem, I find that oil companies respond to changes in expected price volatility by adjusting their drilling activity by a magnitude consistent with the optimal response prescribed by theory.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.