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Empirical Testing of Real Option-Pricing Models

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  • Quigg, Laura
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    Abstract

    This research is the first to examine the empirical predictions of a real option-pricing model using a large sample of market prices. The author finds empirical support for a model that incorporates the option to wait to develop land. The option model has explanatory power for predicting transactions prices over and above the intrinsic value. Market prices reflect a premium for the option to wait to invest that has a mean value of 6 percent in the sample. The author also estimates implied standard deviations for individual commercial property prices ranging from 18 to 28 percent per year. Copyright 1993 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 48 (1993)
    Issue (Month): 2 (June)
    Pages: 621-40

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    Handle: RePEc:bla:jfinan:v:48:y:1993:i:2:p:621-40

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    Cited by:
    1. Laarni Bulan & Christopher Mayer & C. Tsuriel Somerville, . "Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development," Zell/Lurie Center Working Papers 391, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    2. Junjian Miao & Neng Wang, 2005. "Investment, Consumption and Hedging under Incomplete Markets," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-011, Boston University - Department of Economics, revised Sep 2006.
    3. Guido Candela & Massimiliano Castellani & Maurizio Mussoni, 2008. "Tourism Investments Under Uncertainty: an Economic Analysis of “Eco-monsters”," Working Paper Series 07-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
    4. Maurice Tse & Frederik Pretorius & K. Chau, 2011. "Market Sentiments, Winner’s Curse and Bidding Outcome in Land Auctions," The Journal of Real Estate Finance and Economics, Springer, vol. 42(3), pages 247-274, April.
    5. Flavia Cortelezzi & Giovanni Villani, 2007. "Strategic Technology Adoption and Market Dynamics as Option Games," Quaderni DSEMS 14-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
    6. Matthew Clayton & David Yermack, 1999. "Major League Baseball Player Contracts: An Investigation of the Empirical Properties of Real Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-051, New York University, Leonard N. Stern School of Business-.
    7. Murillas Maza, Arantza, 2000. "Uncertainty and Real Options. Investment and Development of Fishing Resources (I)," BILTOKI 2000-01, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    8. Christopher J. Mayer & C. Tsuriel Somerville, 1996. "Unifying empirical and theoretical models of housing supply," Working Papers 96-12, Federal Reserve Bank of Boston.
    9. Jianjun Miao & Neng Wang, 2004. "Investment, Hedging, and Consumption Smoothing," Finance 0407014, EconWPA.
    10. Robert A. Simons & Ron Throupe, 2012. "Debundling Property Rights for Contaminated Properties: Valuing the Opportunity Cost of the Right to Sell, Using Cumulative Options," International Real Estate Review, Asian Real Estate Society, vol. 15(2), pages 231-252.
    11. Xie, Feixue, 2009. "Managerial flexibility, uncertainty, and corporate investment: The real options effect," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 643-655, October.
    12. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2006. "Monte Carlo Simulations versus DCF in Real Estate Portfolio Valuation," ESSEC Working Papers DR 06002, ESSEC Research Center, ESSEC Business School.
    13. Bulan, Laarni T., 2005. "Real options, irreversible investment and firm uncertainty: New evidence from U.S. firms," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 255-279.
    14. Nishihara, Michi, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, Elsevier, vol. 21(4), pages 188-192.
    15. Brenner, Steffen & Härdle, Wolfgang Karl & Schulz, Rainer, 2003. "Immobilienbewertung mit dem Realoptionsverfahren: Eine Umsetzungsstudie," SFB 373 Discussion Papers 2003,19, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    16. Pattikawa, L.H., 2006. "Modeling Brand Extension as a Real Option: How Expectation, Competition and Financial Constraints Drive the Timing of Extensions," ERIM Report Series Research in Management ERS-2006-030-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    17. Clapp, John M. & Eichholtz, Piet & Lindenthal, Thies, 2013. "Real option value over a housing market cycle," Regional Science and Urban Economics, Elsevier, vol. 43(6), pages 862-874.
    18. Clapp, John M. & Bardos, Katsiaryna Salavei & Wong, S.K., 2012. "Empirical estimation of the option premium for residential redevelopment," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 240-256.
    19. Lin Zhao & Sweder van Wijnbergen, . "A Real Option Perspective on Valuing Gas Fields," Tinbergen Institute Discussion Papers 13-126/VI/DSF60, Tinbergen Institute.

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