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| Title: |
The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data |
| Author(s): |
A. Steven Holland, Steven H. Ott, Timothy J. Riddiough |
| Journal: |
Real Estate Economics
Volume 28,
Issue 1,
2000 |
| Full Article: |
REE.V28.1.2.PDF
(right-click on filename and select "Save Target As (IE)" or "Save Link As (Firefox)" to download file)
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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. |
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