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Econometric Testing of the Real Option Hypothesis: Evidence from Investment in Oil Tankers

 

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Econometric Testing of the Real Option Hypothesis: Evidence from Investment in Oil Tankers

George N. Dikos & Dimitrios D. Thomakos

Empirical Economics
Volume 42, Issue 1, February 2012, Pages 121-145
 
Abstract. This article presents an industry equilibrium framework for testing the real option hypothesis with aggregate data: uncertainty and irreversibility (Dixit and Pindyck, Investment under uncertainty, Princeton University Press, Princeton, 1994) raise the critical threshold at which it is optimal to invest, due to the option value of waiting. We propose and empirically test various structural models of investment for new ship orders in the oil tanker industry, which accommodate estimation of the implied real option value multiple. Because of the competitive characteristics of this industry, the property of myopic equivalence (Leahy, Quart J Econ 108:1105–1133, 1993) in a competitive equilibrium is applied, and the traditional serious problems of aggregation are foregone. The derived structural count specifications explain the data well, providing empirical evidence that investors systematically assign value in waiting.

Keywords. Real options, Entry, Count data, Hausman test, Quantile regression

DOI. 10.1007/s00181-010-0412-5


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