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

Ryan Kellogg

No 16541, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D21 D81 E22 L21 L71 Q41 (search for similar items in EconPapers)
Date: 2010-11
Note: EEE EFG IO
References: Add references at CitEc
Citations: View citations in EconPapers (30)

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.

Downloads: (external link)
http://www.nber.org/papers/w16541.pdf (application/pdf)

Related works:
Journal Article: The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:16541

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w16541

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().