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Empirical Testing of Real Option‐Pricing Models
Author(s) -
QUIGG LAURA
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb04730.x
Subject(s) - econometrics , explanatory power , economics , sample (material) , valuation of options , empirical research , value (mathematics) , financial economics , option value , microeconomics , statistics , mathematics , philosophy , chemistry , epistemology , chromatography , incentive
This research is the first to examine the empirical predictions of a real option‐pricing model using a large sample of market prices. We find empirical support for a model that incorporates the option to wait to develop land. The option model has explanatory power for predicting transactions prices over and above the intrinsic value. Market prices reflect a premium for the option to wait to invest that has a mean value of 6% in our sample. We also estimate implied standard deviations for individual commercial property prices ranging from 18 to 28% per year.