This paper statistically tests the option theory of irreversible investment under uncertainty. Using contingent claims valuation, we derive the value of options to invest in capacity, where the projects are endogenous to the economic circumstances prevailing at the investment date. We then test...

This paper statistically tests the theory of irreversible investment under uncertainty. Using dynamic programming and contingent claims valuation alternatively, we derive the value of options to invest in capacity, where the projects are endogenous to the economic circumstances prevailing at the...