Business Publications
Document Type
Article
Publication Date
2018
Abstract
State-of-the-art real option models predict that uncertainty lowers investments and that this effect's magnitude aligns with theory (see Kellogg (2014)). We present a model that illustrates how changes in uncertainty can result in changes in the cost of making investments rather than in changes in the level of investment. Earlier studies commonly focus on the Gulf of Mexico to examine the uncertainty-investment relation. In this region, we collect a unique dataset on the rental rates of drilling rigs to test the model. Our empirical analysis confirms that after we control for several relevant economic variables, price uncertainty negatively affects rig rates.
