IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Can Hysteresis And Real Options Explain The Farmland Valuation Puzzle?

  • Turvey, Calum G.

This paper proposes that the common finding that land prices are systematically higher than their fundamental value as measured by the present value of future cash might be due to real options arising from uncertainty in cash flows. The paper posits a model in which the seller has a real option to postpone the sale of land. Because the value of land is measured as a present value, the buyer does not hold a similar option to postpone the purchase. It is argued that the seller's option offers a plausible explanation for the wedge between observed farmland prices and the present value model. The paper uses a Dixit and Pindyck (1996) real options framework. Using historical cash flow and land price information for Ontario, it is shown how real options can lead to a land price greater than that predicted by the present value model. The findings also suggest the existence of land price bubbles and shows how a real options framework can be used to detect bubbles.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://purl.umn.edu/34131
Download Restriction: no

Paper provided by University of Guelph, Department of Food, Agricultural and Resource Economics in its series Working Papers with number 34131.

as
in new window

Length:
Date of creation: 2002
Date of revision:
Handle: RePEc:ags:uguewp:34131
Contact details of provider: Web page: http://fare.uoguelph.ca/

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Harrison Hong & Jeremy C. Stein, 1997. "A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets," NBER Working Papers 6324, National Bureau of Economic Research, Inc.
  2. Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Bryant, Amy & Richards, Timothy J., 1998. "Hysteresis And The Shortage Of Agricultural Labor," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20858, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Turvey, Calum G. & Baker, Timothy G. & Weersink, Alfons, 1992. "Farm Operating Risk And Cash Rent Determination," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
  5. Jonathan Berk & Richard C. Green & Vasant Naik, . "Optimal Investment, Growth Options and Security Returns," GSIA Working Papers 64, Carnegie Mellon University, Tepper School of Business.
  6. Hansen, Robert G, 1987. "A Theory for the Choice of Exchange Medium in Mergers and Acquisitions," The Journal of Business, University of Chicago Press, vol. 60(1), pages 75-95, January.
  7. John Heaton & Deborah Lucas, 2000. "Stock Prices and Fundamentals," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 213-264 National Bureau of Economic Research, Inc.
  8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  9. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research.
  10. Lenos Trigeorgis, 1993. "Real Options and Interactions With Financial Flexibility," Financial Management, Financial Management Association, vol. 22(3), Fall.
  11. Barry Falk & Bong-Soo Lee & Rauli Susmel, 2001. "Fads versus Fundamentals in Farmland Prices: Reply," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 1078-1081.
  12. Falk, Barry L., 1991. "Formally Testing the Present Value Model of Farmland Prices," Staff General Research Papers Archive 11093, Iowa State University, Department of Economics.
  13. Jeffrey R. Stokes & William I. Nayda & Burton C. English, 1997. "The Pricing of Revenue Assurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 439-451.
  14. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
  15. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  16. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  17. Maurice J. Roche, 2001. "Fads versus fundamentals in farmland prices: comment," Economics, Finance and Accounting Department Working Paper Series n1070301, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  18. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
  19. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  20. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  21. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  22. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  23. J. Stephen Clark & Murray Fulton & John T. Scott, 1993. "The Inconsistency of Land Values, Land Rents, and Capitalization Formulas," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(1), pages 147-155.
  24. Barry Falk & Bong-Soo Lee, 1998. "Fads versus Fundamentals in Farmland Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 696-707.
  25. Bailey, Warren, 1991. "Valuing agricultural firms : An examination of the contingent-claims approach to pricing real assets," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 771-791, October.
  26. Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
  27. Capozza Dennis R. & Sick Gordon A., 1994. "The Risk Structure of Land Markets," Journal of Urban Economics, Elsevier, vol. 35(3), pages 297-319, May.
  28. Suresh M. Sundaresan, 2000. "Continuous-Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, 08.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ags:uguewp:34131. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.