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Can Hysteresis And Real Options Explain The Farmland Valuation Puzzle?

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  • Turvey, Calum G.

Abstract

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.

Suggested Citation

  • Turvey, Calum G., 2002. "Can Hysteresis And Real Options Explain The Farmland Valuation Puzzle?," Working Papers 34131, University of Guelph, Department of Food, Agricultural and Resource Economics.
    • Handle: RePEc:ags:uguewp:34131
    DOI: 10.22004/ag.econ.34131
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    Cited by:

    1. Odening, Martin & Musshoff, Oliver & Huettel, Silke, 2003. "Empirische Validierung von Realoptionsmodellen," Working Paper Series 18825, Humboldt University Berlin, Department of Agricultural Economics.
    2. Jason Winfree & Jill McCluskey & Ron Mittelhammer, 2006. "Buyer-Type Effects in Conservation and Preservation Property Values," The Journal of Real Estate Finance and Economics, Springer, vol. 33(2), pages 167-179, September.
    3. David Sparling & Calum G. Turvey, 2003. "Further thoughts on the relationship between economic value added and stock market performance," Agribusiness, John Wiley & Sons, Ltd., vol. 19(2), pages 255-267.
    4. Maart, Syster Christin & Musshoff, Oliver & Odening, Martin & Schade, Christian, 2011. "Closing down the Farm: An Experimental Analysis of Disinvestment Timing," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114375, European Association of Agricultural Economists.
    5. Xu, Jin & Leatham, David J., 2010. "Dynamic Analysis of Land Prices with Flexible Risk Aversion Coefficients," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61872, Agricultural and Applied Economics Association.
    6. Maart, Syster Christin & Musshoff, Oliver & Odening, Martin & Schade, Christian, 2010. "Zum Desinvestitionsverhalten Landwirtschaftlicher Unternehmer: Ergebnisse Einer Experimentellen Untersuchung," 50th Annual Conference, Braunschweig, Germany, September 29-October 1, 2010 93943, German Association of Agricultural Economists (GEWISOLA).
    7. Winfree, Jason A. & McCluskey, Jill J. & Mittelhammer, Ronald C., 2002. "An Option Value Approach To Valuing Preservation Properties," 2002 Annual Meeting, July 28-31, 2002, Long Beach, California 36619, Western Agricultural Economics Association.
    8. Gabruch, Mandy L. & Micheels, Eric T., 2017. "2016 WAEA Winning Student Submission: The Effect of Saskatchewan's Ownership Restrictions on Farmland Values," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(1), pages 1-13, January.

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