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Irreversible Investments And Volatile Markets: A Study Of The Chemical Processing Industry

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  • Gregory K. Bell
  • José M. Campa

Abstract

This paper investigates the empirical effect of volatility on irreversible investments. We use a sample of chemical products in the United States and the European Union to test the impact of volatility on new investments in capacity. We distinguish among three sources of volatility: exchange rates, input prices, and product demand. We find that the effects of volatility on the amount of capacity investment differ depending on the source of volatility. Input prices and product demand volatility do not appear to have a material and statistically significant effect in either the United States or the European Union. In contrast, exchange rate volatility has a significant negative impact on investment by chemical manufacturers in the European Union. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 79 (1997)
Issue (Month): 1 (February)
Pages: 79-87

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Handle: RePEc:tpr:restat:v:79:y:1997:i:1:p:79-87

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Laarni Bulan & Christopher J. Mayer & C. Tsuriel Somerville, 2006. "Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development," NBER Working Papers 12486, National Bureau of Economic Research, Inc.
  2. Timothy Dunne & Xiaoyi Mu, 2008. "Investment spikes and uncertainty in the petroleum refining industry," Working Paper 0805, Federal Reserve Bank of Cleveland.
  3. repec:dgr:uvatin:2009044 is not listed on IDEAS
  4. Susan Sunila Sharma & Paresh Kumar Narayan, 2012. "Investment and oil price volatility," Economics Bulletin, AccessEcon, vol. 32(2), pages 1428-1433.
  5. Landon, Stuart & Smith, Constance, 2007. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," MPRA Paper 9958, University Library of Munich, Germany.
  6. Hisham Foad, 2005. "Currency Unions, Options, and Foreign Direct Investment," Emory Economics 0516, Department of Economics, Emory University (Atlanta).
  7. Demir, Firat, 2007. "Private Investment, Portfolio Choice and Financialization of Real Sectors in Emerging Markets," MPRA Paper 3835, University Library of Munich, Germany, revised Jul 2007.
  8. 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.
  9. Yongil Jeon & Taekwon Kim & Stephen M. Miller, 2004. "The Value of Waiting: Foreign Direct Investment with Uncertainty and Imperfect Local Knowledge," Working papers 2004-44, University of Connecticut, Department of Economics.
  10. Richard H. Mattoon, 2005. "Energy markets and the Midwest economy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 19-31.
  11. Landon, Stuart & Smith, Constance E., 2006. "Exchange rates and investment good prices: A cross-industry comparison," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 237-256, March.
  12. Shieh, Bih-Lian & Wu, Tzong-Chen, 2012. "Equity-based entry modes of the Greater Chinese Economic Area's foreign direct investments in Vietnam," International Business Review, Elsevier, vol. 21(3), pages 508-517.
  13. Baek, H. Young & Kwok, Chuck C. Y., 2002. "Foreign exchange rates and the corporate choice of foreign entry mode," International Review of Economics & Finance, Elsevier, vol. 11(2), pages 207-227, May.
  14. Serven, Luis, 1998. "Macroeconomic uncertainty and private investment in developing countries - an empirical investigation," Policy Research Working Paper Series 2035, The World Bank.
  15. Demir, Firat, 2010. "Exchange Rate Volatility and Employment Growth in Developing Countries: Evidence from Turkey," World Development, Elsevier, vol. 38(8), pages 1127-1140, August.
  16. Escobari, Diego & Lee, Jim, 2013. "Demand Uncertainty and Capacity Utilization in Airlines," MPRA Paper 46059, University Library of Munich, Germany.
  17. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "The Impact of Uncertainty on Investment: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-060/3, Tinbergen Institute.
  18. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, vol. 78(1), pages 95-113, October.

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