Testing the Option Vakue Theory of Irreversible Investment
AbstractThis paper statistically tests the theory of irreversible investment under uncertainty. Using dynamic programming and contingent claims valuation alternatively, 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 capacity investment decisions made by Canadian copper mines are compatible with the theory. The result speak strongly in favor of option theory as a theory of real investment; in particular, we provide a test which rejects the Net Present Value criterion, and our model explains both investment size and timing satisfactorily from a statistical and from an economic point of view. En recourrant tour Ã tour Ã la programmation dynamique et Ã la mÃ©thode des actifs contigents, nous Ã©tablissons la valeur de l'option d'effectuer des investissements irrÃ©versibles rÃ©els qui sont sensibles aux paramÃ¨tres Ã©conomiques prÃ©valant au moment de la dÃ©cision. Nous testons ensuite si des investissements en capacitÃ© de production effectuÃ©s par des mines de cuivre canadiennes sont conformes aux implications de la thÃ©orie. Les rÃ©sultats sont fortements en faveur de celle-ci; nos donnÃ©es rejettent le critÃ¨re de la valeur actuelle nette et le modÃ¨le explique tant la taille que la date des investissements d'une maniÃ¨re statistiquement et Ã©conomiquement satisfaisante.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Universite Aix-Marseille III in its series G.R.E.Q.A.M. with number 95b04.
Length: 32 pages
Date of creation: 1995
Date of revision:
Contact details of provider:
Postal: G.R.E.Q.A.M., (GROUPE DE RECHERCHE EN ECONOMIE QUANTITATIVE D'AIX MARSEILLE), CENTRE DE VIEILLE CHARITE, 2 RUE DE LA CHARITE, 13002 MARSEILLE.
Web page: http://www.greqam.fr/
More information through EDIRC
DYNAMIC PROGRAMMING; INVESTMENTS;
Other versions of this item:
- Harchaoui, Tarek M & Lasserre, Pierre, 2001. "Testing the Option Value Theory of Irreversible Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 141-66, February.
- 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," CIRANO Working Papers 99s-35, 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.
- 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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gordon, Robert J, 1992.
"Measuring the Aggregate Price Level: Implications for Economic Performance and Policy,"
CEPR Discussion Papers
663, C.E.P.R. Discussion Papers.
- Robert J. Gordon, 1992. "Measuring the Aggregate Price Level: Implications For Economic Performance and Policy," NBER Working Papers 3969, National Bureau of Economic Research, Inc.
- George Koutoulas & Lawrence Kryzanowski, 1994. "Integration or Segmentation of the Canadian Stock Market: Evidence Based on the APT," Canadian Journal of Economics, Canadian Economics Association, vol. 27(2), pages 329-51, May.
- Enrico Pennings & Carlo Altomonte, 2006.
"The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real-option Model,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 68(5), pages 569-593, October.
- Carlo Altomonte & Enrico Pennings, 2004. "The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real Option Model," Working Papers 259, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Xin Guo & Jianjun Miao & Erwan Morellec, 2002.
"Irreversible Investment with Regime Shifts,"
FAME Research Paper Series
rp99, International Center for Financial Asset Management and Engineering.
- Muehlenbachs, Lucija, 2012. "Testing for Avoidance of Environmental Obligations," Discussion Papers dp-12-12, Resources For the Future.
- Di Corato, Luca, 2010.
"Profit Sharing under the Threat of Nationalization,"
58292, Swedish University of Agricultural Sciences, Department of Economics.
- Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.
- Luca Di Corato, 2010. "Profit Sharing under the Threat of Nationalization," Working Papers 2010.5, Fondazione Eni Enrico Mattei.
- repec:hal:journl:halshs-00272041 is not listed on IDEAS
- repec:hal:journl:halshs-00343702 is not listed on IDEAS
- Löfgren, Åsa & Millock, Katrin & Nauges, Céline, 2008.
"The effect of uncertainty on pollution abatement investments: Measuring hurdle rates for Swedish industry,"
Resource and Energy Economics,
Elsevier, vol. 30(4), pages 475-491, December.
- Asa LÃ¶fgren & Katrin Millock & Celine Nauges, 2008. "The effect of uncertainty on pollution abatement investments: measuring hurdle rates for Swedish industry," Working Papers 24847, Institut National de la Recherche Agronomique, France.
- Åsa Löfgren & Katrin Millock & Céline Nauges, 2008. "The Effect of Uncertainty on Pollution Abatement Investments: Measuring Hurdle Rates for Swedish Industry," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00343702, HAL.
- LOFGREN Asa & MILLOCK Katrin & NAUGES CÃ©line, 2007.
"Using Ex Post Data to Estimate the Hurdle Rate of Abatement Investments - An application to the Swedish Pulp and Paper Industry and Energy Sector,"
LERNA Working Papers
07.06.227, LERNA, University of Toulouse.
- Katrin Millock & Céline Nauges & Åsa Löfgren, 2007. "Using Ex Post Data to Estimate the Hurdle Rate of Abatement Investments – An Application to the Swedish Pulp and Paper Industry and Energy Sector," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00272041, HAL.
- Löfgren, Åsa & Millock, Katrin & Nauges, Céline, 2007. "Using Ex Post Data to Estimate the Hurdle Rate of Abatement Investments - An Application to the Swedish Pulp and Paper Industry and Energy Sector," Working Papers in Economics 249, University of Gothenburg, Department of Economics.
- Turvey, Calum G. & Toole, Andrew A. & Kropp, Jaclyn D., 2007. "An Empirical Examination of the Relationship Between Real Options Values and the Rate of Investment," 2007 1st Forum, February 15-17, 2007, Innsbruck, Austria 6606, International European Forum on Innovation and System Dynamics in Food Networks.
- repec:hal:journl:halshs-00261523 is not listed on IDEAS
- Sumru Altug & Fanny S. Demers & Michel Demers, 2004. "Tax Policy and Irreversible Investment," CDMA Working Paper Series 200404, Centre for Dynamic Macroeconomic Analysis.
- Guido Fioretti, 2005.
"A Model of Primary and Secondary Waves in Investment Cycles,"
Society for Computational Economics, vol. 24(4), pages 357-381, June.
- Guido Fioretti, 2002. "A Model of Primary and Secondary Waves in Investment Cycles," Microeconomics 0207014, EconWPA.
- Insley, M.C. & Wirjanto, T.S., 2010.
"Contrasting two approaches in real options valuation: Contingent claims versus dynamic programming,"
Journal of Forest Economics,
Elsevier, vol. 16(2), pages 157-176, April.
- Margaret Insley & Tony Wirjanto, 2008. "Contrasting two approaches in real options valuation: contingent claims versus dynamic programming," Working Papers 08002, University of Waterloo, Department of Economics.
- Robert Cairns, 2004. "Green Accounting for an Externality, Pollution at a Mine," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 27(4), pages 409-427, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.