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On the use of the Financial Option Price Model to Value and Explain Vacant Urban Land
Author(s) -
Geltner David
Publication year - 1989
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00479
Subject(s) - speculation , economics , value (mathematics) , realm , empirical research , land use , option value , gauge (firearms) , actuarial science , financial economics , microeconomics , finance , computer science , incentive , epistemology , machine learning , political science , law , history , civil engineering , engineering , philosophy , archaeology
This paper reviews the financial option model of under‐utilizing urban land, with primary attention to the question of whether and how the model might move beyond the academic realm toward practical and quantitative applications. It is argued that the theoretical underpinnings that give the option model such power in the financial securities field do not extend to land applications, making it more important to justify the model empirically. Numerical analysis using a “decision analysis” type model of land option value is used in the paper to help guide and focus such empirical study. It is noted that while the option model focuses primary attention on uncertainty in future building values as the cause of land being held undeveloped, previous deterministic models focused on expected future growth in such values as the main cause for land speculation. As these two causes can have different policy implications, it would be desirable to use empirical analysis to gauge their relative importance. A strategy for empirically testing the option model of land is suggested, and concludes that definitive empirical tests will be difficult to achieve, in part because of the subjective nature of many of the model inputs.