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Testing Real Options Theory Using Data on Capital Adequacy

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Author Info
Ciaran Driver and Katsushi Imai () (Department of Economics, Royal Holloway, University of London)

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Abstract

This paper uses unique survey-based data that record the extent of positive and negative disequibrium in capital stock at industry level. We observe movement in this disequilibrium and model it to take account of long-run plans, short-term revisions to expectations, and the influence of uncertainty on adjustment. We find that increased uncertainty slows the adjustment of fixed capital towards equilibrium levels, in line with the predictions of real options theory and partial irreversibility models.

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File URL: http://www.rhul.ac.uk/economics/Research/WorkingPapers/pdf/dpe0303.pdf
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Publisher Info
Paper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 03/3.

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Length: 18 pages
Date of creation: Dec 2003
Date of revision: Dec 2003
Handle: RePEc:hol:holodi:0303

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Related research
Keywords: Investment; Industry; Irreversibility; Real Options; Uncertainty;

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

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This page was last updated on 2009-12-2.

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