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

56 Pages Posted: 22 Nov 2010 Last revised: 12 Sep 2022

See all articles by Ryan Kellogg

Ryan Kellogg

University of California, Berkeley

Date Written: November 2010

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.

Suggested Citation

Kellogg, Ryan, The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling (November 2010). NBER Working Paper No. w16541, Available at SSRN: https://ssrn.com/abstract=1711681

Ryan Kellogg (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

HOME PAGE: http://are.berkeley.edu/~kellogg/index.html

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