Empirical Testing of Real Option‐Pricing Models
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- Author(s): LAURA QUIGG
- Published: Apr 30, 2012
- Pages: 621-640
- DOI: 10.1111/j.1540-6261.1993.tb04730.x
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.