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

Ryan Kellogg

American Economic Review, 2014, vol. 104, issue 6, 1698-1734

Abstract: This paper estimates the response of investment to changes in uncertainty using data on oil drilling in Texas and the expected volatility of the future price of oil. Using a dynamic model of firms' investment problem, I find that: (1) the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory, (2) the cost of failing to respond to volatility shocks is economically significant, and (3) implied volatility data derived from futures options prices yields a better fit to firms' investment behavior than backward-looking volatility measures such as GARCH.

JEL-codes: C58 D92 G13 G31 L71 Q31 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.6.1698
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Citations: View citations in EconPapers (173)

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Working Paper: The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling (2010)
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