Empirical Testing of Real Option-Pricing Models

Authors

  • LAURA QUIGG

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    • Department of Finance, University of Illinois at Urbana-Champaign. The author thanks Peter Berck, Peter Colwell, Robert Edelstein, Bjorn Flesaker, Steven Grenadier, Hayne Leland, Jay Ritter, Anthony Sanders, René Stulz, Sheridan Titman, Nancy Wallace, Joseph Williams, and seminar participants at the University of Illinois, the 1992 Western Finance Association Meetings, and the Norwegian School of Management, and two anonymous referees for useful comments.


ABSTRACT

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.

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