Barriers and Optimal Investment

This paper analyzes the impact of different types of barriers on the decision to invest using a simple framework based on stochastic discount factors. Our intuitive approach proposes an alternative to the real options methodology that does not rely on the “smooth-pasting condition.” An application to MacDonald and Siegel’s canonical investment problem (1986) shows that the standard investment threshold over-estimates the optimal threshold when the lower barrier is absorbing and under-estimates it when the lower barrier is reflecting.investment; uncertainty; irreversibility; barriers; real options

Understanding Household Preferences For Alternative-Fuel Vehicle Technologies

This report explores consumer preferences among four different alternative-fuel vehicles (AFVs): hybrid electric vehicles (HEVs), compressed natural gas (CNG) vehicles, hydrogen fuel cell (HFC) vehicles, and electric vehicles (EVs). Although researchers have been interested in understanding consumer preferences for AFVs for more than three decades, it is important to update our estimates of the trade-offs people are willing to make between cost, environmental performance, vehicle range, and refuel¬ing convenience. We conducted a nationwide, Internet-based survey to assess consumer preferences for AFVs. Respondents participated in a stated-preference ranking exercise in which they ranked a series of five vehicles (four AFVs and a traditional gasoline-fueled vehicle) that differ primarily in fuel type, price, environmental performance, vehicle range, and refueling conve¬nience. Our findings indicate that, in general, gasoline-fueled vehicles are still preferred over AFVs, however there is a strong interest in AFVs. No AFV type is overwhelmingly preferred, although HEVs seem to have an edge. Using a panel rank-ordered mixed logit model, we assessed the trade-offs people make between key AFV characteristics. We found that, in order to leave a person’s utility unchanged, a $1,000 increase in AFV cost needs to be compensated by either: (1) a$300 savings in driving cost over 12,000 miles; (2) a 17.5 mile increase in vehicle range; or (3) a 7.8-minute decrease in total refueling time (e.g. finding a gas station and refueling)

Simulation-Based Exact Tests for Jump-Diffusions with Unidentified Nuisance Parameters. An Application to Commodities Spot Prices

In this paper, we propose to use the Monte-Carlo (MC) test technique to obtain valid p-values when testing for the presence of discontinuities in jump-diffusion models. Indeed, the LR statistic used to test for discontinuities has typically a complex non-standard distribution, for at least two reasons: the jump frequency parameter lies on the boundary of its domain, and unidentified nuisance parameters intervene under the null hypothesis. We show that, if no other (identified) nuisance parameters are present (e.g. the geometric Brownian motion case), the proposed p-value is finite sample exact. Otherwise, we derive nuisance-parameter free bounds on the null distribution of the LR and obtain exact bounds p-values. We illustrate our approach with four classes of jump diffusion models (geometric Brownian motion and logarithmic Ornstein-Uhlenbeck, with and without a GARCH(1,1) error structure), which we apply to weekly and monthly spot prices of non-precious metals, gold, and crude oil. We find significant jumps in all weekly time series, but only in a few monthly time series.

Simulation-Based Exact Tests with Unidentified Nuisance Parameters under the Null Hypothesis : the Case of Jumps Tests in Model with Conditional Heteroskedasticity

We use the Monte-Carlo (MC) test technique to find valid p-values when testing for discontinuities in jump-diffusion models. While the distribution of the LR statistic for this test is typically non-standard, we show that the MC p-value is finite sample exact if no other (identified) nuisance parameter is present. Otherwise, we derive nuisance-parameter free bounds and obtain exact bounds p-values. We illustrate our approach on four classes of jump-diffusion models we use to model spot prices of copper, nickel, gold, and crude oil. We find significant jumps in all weekly time series and in a few monthly time series.Monte-Carlo test, bounds test, discontinuous process, conditional heteroscedasticity

Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro-Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the regulatory process and when to invest depend on the duration of the regulatory green light.Regulation, uncertainty, irreversibility, real options, interconnections

Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection.

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro-Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the reglulatory process and when to invest depend on the duration of the regulatory green light.Regulation, uncertainty, irreversibility, real options; interconnections

Environmental Impact Assessment and Investment under Uncertainty: An Application to Power Grid Interconnection

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the regulatory process and when to invest depend on the duration of the regulatory green light. Nous considérons une firme qui doit se soumettre à un processus réglementaire long et coûteux avant de réaliser un investissement irréversible. La valeur de cet investissement est aléatoire et un délai de mise en service est nécessaire. Nous analysons deux cas : l'approbation réglementaire est toujours valide ou elle a une durée finie. Nous appliquons notre modèle à un projet d'Hydro Québec : la construction d'une interconnexion de 1250 mégawatts avec l'Ontario. Nous montrons que la firme débute le processus réglementaire plus tôt si l'approbation réglementaire est suffisamment longue ou si l'incertitude est assez élevée; autrement elle le retarde. Ces décisions dépendent aussi de la durée de l'approbation réglementaire.regulation, uncertainty, irreversibility, real options, interconnections, réglementation, incertitude, irréversibilité, options réelles, interconnexions

On Jumps and Arch Effects in Natural Resource Prices. An Application to Stumpage Prices from Pacific Northwest National Forests

Models used for natural resources prices usually preclude the possibility of large changes (jumps) resulting from discrete, unexpected events. To test for the presence of jumps and ARCH effects, we propose to use bounds and bootstrap test techniques, thus solving the unidentified nuisance parameter problem. We apply this approach to stumpage price time series from the Pacific Northwest and find evidence of jumps and ARCH effects. Using real options, we then develop a stopping model to assess the impact of neglecting jumps on the decision to harvest old-growth timber. Our numerical results show the importance of modeling jumps explicitly.Jump processes, ARCH, Bootstrap, Stumpage prices, Real options

On Jumps and ARCH Effects in Natural Resource Prices. An Application to Stumpage Prices from Pacific Northwest National Forests

Models use for natural resources prices usually preclude the possibility of large changes (jumps) resulting from discrete, unexpected events. To test for the presence of jumps and ARCH effects, we propose to use bounds and bootstrap test techniques, thus solving the unidentified nuisance parameter problem. We apply this approach to stumpage price time series from the Pacific Northwest and find evidence of jumps and ARCH effects. Using real options, we then develop a stopping model to assess the impact of neglecting jumps on the decision to harvest old-growth timber. Our numerical results show the importance of modeling jumps explicitly.Jum Processes, ARCH, Bootstrap, Stumpage Prices, Real Options

The Economic Threshold With a Stochastic Pest Population: An Application to the European Red Mite

WP 1996-09 August 199