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The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling

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  • Ryan Kellogg

Abstract

Despite widespread application of real options theory in the literature, the extent to which firms actually delay irreversible investments following an increase in the uncertainty of their environment is not empirically well-known. This paper estimates firms’ responsiveness to changes in uncertainty using detailed data on oil well drilling in Texas and expectations of future oil price volatility derived from the NYMEX futures options market. Using a dynamic model of firms’ investment problem, I find that oil companies respond to changes in expected price volatility by adjusting their drilling activity by a magnitude consistent with the optimal response prescribed by theory.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16541.

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Date of creation: Nov 2010
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Publication status: published as Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
Handle: RePEc:nbr:nberwo:16541

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  6. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 5(2), pages 217-49, April.
  7. Jesús Fernández-Villaverde & Pablo A. Guerrón-Quintana & Juan Rubio-Ramírez & Martín Uribe, 2009. "Risk Matters: The Real Effects of Volatility Shocks," NBER Working Papers 14875, National Bureau of Economic Research, Inc.
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Cited by:
  1. repec:clg:wpaper:2013-03 is not listed on IDEAS
  2. Nora Traum & Michael Plante, 2012. "Time-Varying Oil Price Volatility and Macroeconomic Aggregates," 2012 Meeting Papers, Society for Economic Dynamics 455, Society for Economic Dynamics.
  3. Soojin Jo, 2012. "The Effects of Oil Price Uncertainty on the Macroeconomy," Working Papers, Bank of Canada 12-40, Bank of Canada.
  4. Lutz Kilian & Robert J. Vigfusson, 2011. "Nonlinearities in the oil price-output relationship," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1013, Board of Governors of the Federal Reserve System (U.S.).
  5. Alquist, Ron & Kilian, Lutz & Vigfusson, Robert J., 2011. "Forecasting the Price of Oil," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8388, C.E.P.R. Discussion Papers.
  6. Ine Van Robays, 2012. "Macroeconomic Uncertainty and the Impact of Oil Shocks," CESifo Working Paper Series 3937, CESifo Group Munich.
  7. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2014. "Hotelling Under Pressure," NBER Working Papers 20280, National Bureau of Economic Research, Inc.
  8. Muehlenbachs, Lucija, 2012. "Testing for Avoidance of Environmental Obligations," Discussion Papers, Resources For the Future dp-12-12, Resources For the Future.

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