Real Options and Endogenous Investment Costs: Evidence from Oil Rig Rates
34 Pages Posted: 8 Nov 2017 Last revised: 2 Apr 2018
Date Written: March 2018
We use a unique dataset on the utilization and the rental rates of offshore drilling rigs to test whether changes in uncertainty can result in changes in investment costs rather than in changes in investment levels. Our empirical analysis con firms that price uncertainty negatively affects rig rental rates. We do not, however, find a signi cant response of drilling activity to price uncertainty. The observed negative relation between price uncertainty and rig rental rates along with the absence of a relation between drilling activity and price uncertainty is consistent with a model where the supply of drilling rigs is inelastic.
Keywords: Real Options, Commodity Market
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