The Effect of Uncertainty on Investment : Evidence from Texas Oil Drilling †

@inproceedings{Kellogg2010TheEO,
  title={The Effect of Uncertainty on Investment : Evidence from Texas Oil Drilling †},
  author={Ryan P. Kellogg},
  year={2010}
}
This paper estimates the response of investment to changes in uncertainty using data on oil drilling in Texas and the expected volatility of the future price of oil. Using a dynamic model of firms’ investment problem, I find that: (i) the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory, (ii) the cost of failing to respond to volatility shocks is economically significant, and (iii) implied volatility data… CONTINUE READING
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