Testing the Option Value Theory of Irreversible Investment
AbstractThis article statistically tests the option theory of irreversible investment. Using contingent claims valuation, we derive the value of options to invest in capacity, where the projects are endogenous to the economic circumstances prevailing at the investment date. We then test whether decisions made by Canadian copper mines are compatible with the trigger price implied by the theory. Our model explains investment size and timing satisfactorily from a statistical and an economic point of view; simulations with a mean-reverting process suggest that the results do not depend crucially on the assumption that price follows a geometric Brownian motion.
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Bibliographic InfoArticle provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.
Volume (Year): 42 (2001)
Issue (Month): 1 (February)
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Other versions of this item:
- Tarek M. Harchaoui & Pierre Lasserre, 1995. "Testing the Option Value Theory of Irreversible Investment," CIRANO Working Papers 95s-41, CIRANO.
- Tarek M. Harchaoui & Pierre Lasserre, 1999. "Testing the Option Value Theory of Irreversible Investment," Cahiers de recherche du DÃ©partement des sciences Ã©conomiques, UQAM 9905, Université du Québec à Montréal, Département des sciences économiques.
- Harchaoui, T. & Lasserre, P., 1995. "Testing the Option Vakue Theory of Irreversible Investment," G.R.E.Q.A.M. 95b04, Universite Aix-Marseille III.
- Tarek M. Harchaoui & Pierre Lasserre, 1999. "Testing the Option Value Theory of Irreversible Investment," CIRANO Working Papers 99s-35, CIRANO.
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- G1 - Financial Economics - - General Financial Markets
- L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
- Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
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