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Real options or disaster risk? Distinguishing uncertainty effects on investment

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  • Hanno Dihle
  • Rafael Mentges

Abstract

Motivated by the fact that uncertainty shocks are a countercyclical phenomenon, this article takes a deeper look at the nature of uncertainty shocks in times of crisis and its effect on the real economy. We distinguish between volatility and disaster risk shocks and specify the consequences of these shock specifications on investment decisions. We first analyse the different impact of both shocks within a real options framework. Our theoretical results show that the effects of the two shocks are different, especially concerning disinvestment and the mid-term investment response. Second, we perform structural vector autoregression (SVAR) estimations on different country data sets. The SVAR estimations confirm our theoretical hypothesis: countries more prone to states of disaster do not show the usual real option pattern of investment to an uncertainty shock.

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  • Hanno Dihle & Rafael Mentges, 2018. "Real options or disaster risk? Distinguishing uncertainty effects on investment," Applied Economics, Taylor & Francis Journals, vol. 50(34-35), pages 3771-3786, July.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:34-35:p:3771-3786
    DOI: 10.1080/00036846.2018.1436156
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    Cited by:

    1. Hui Zhang & Yuyao Qian & Liying Yu & Zheng Wang, 2020. "Integrated Development of Information Technology and the Real Economy in China Based on Provincial Panel Data," Sustainability, MDPI, vol. 12(17), pages 1-17, August.

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