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Testing Real Options Theory Using Data on Capital Adequacy

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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.

Suggested Citation

  • Ciaran Driver and Katsushi Imai, 2003. "Testing Real Options Theory Using Data on Capital Adequacy," Royal Holloway, University of London: Discussion Papers in Economics 03/3, Department of Economics, Royal Holloway University of London, revised Dec 2003.
    • Handle: RePEc:hol:holodi:0303
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    File URL: http://www.rhul.ac.uk/economics/Research/WorkingPapers/pdf/dpe0303.pdf
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    More about this item

    Keywords

    Investment; Industry; Irreversibility; Real Options; Uncertainty;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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