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The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data
Author(s) -
Holland A. Steven,
Ott Steven H.,
Riddiough Timothy J.
Publication year - 2000
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 - 10.1111/1540-6229.00792
Subject(s) - economics , investment (military) , real estate , asset (computer security) , investment decisions , econometrics , financial economics , microeconomics , finance , behavioral economics , computer security , politics , political science , computer science , law
Neoclassical investment decision criteria suggest that only the systematic component of total risk affects the rate of investment, as channeled through the built‐asset price. Alternatively, option‐based investment models suggest a direct role for total uncertainty in investment decisionmaking. To sort out uncertainty's role in investment, we specify and empirically estimate a structural model of asset‐market equilibrium. Commercial real estate time‐series data with two distinct measures of asset price and uncertainty are used to assess the competing investment models. Empirical results generally favor predictions of the option‐based model and hence suggest that irreversibility and delay are important considerations to investors. Our findings also have implications for macroeconomic policy and for forecasts of cyclical investment activity.