REAL OPTIONS
in THEORY and PRACTICE
in THEORY and PRACTICE
All rights reserved.
About the Author
Graeme Guthrie is a professor in the School of Economics and Finance at
Victoria University of Wellington, New Zealand. He has a PhD in mathematics
and has taught economics and finance since 1995. As a consultant he has
provided advice on a wide variety of issues in relation to agriculture,
electricity, gas, real estate, and telecommunications, much of it using real
options analysis. His research articles on real options have appeared in:
Journal of Finance; Journal of Financial and Quantitative Analysis; Journal of
Banking and Finance; and other journals. His research in other areas of
economics and finance has been published in: European Economic Review;
International Journal of Industrial Organization; Journal of Economic Literature;
Journal of Industrial Economics; Journal of Monetary Economics; Journal of
Money, Credit and Banking; and other journals.
Book
Selected journal articles
Other journal articles
Victoria University of Wellington, New Zealand. He has a PhD in mathematics
and has taught economics and finance since 1995. As a consultant he has
provided advice on a wide variety of issues in relation to agriculture,
electricity, gas, real estate, and telecommunications, much of it using real
options analysis. His research articles on real options have appeared in:
Journal of Finance; Journal of Financial and Quantitative Analysis; Journal of
Banking and Finance; and other journals. His research in other areas of
economics and finance has been published in: European Economic Review;
International Journal of Industrial Organization; Journal of Economic Literature;
Journal of Industrial Economics; Journal of Monetary Economics; Journal of
Money, Credit and Banking; and other journals.
Book
- Real Options in Theory and Practice. Oxford University Press, New York
(2009).
Selected journal articles
- "Price-cap regulation and the scale and timing of investment" (with
Lew Evans). RAND Journal of Economics (forthcoming). - "Uncertainty and the trade-off between scale and flexibility in
investment". Journal of Economic Dynamics and Control (forthcoming). - "Holding onto your horses: Conflicts of interest in asset management"
(with Glenn Boyle and Luke Gorton). Journal of Law and Economics 53
(4), 689-713 (2010). - "House prices, development costs, and the value of waiting". Journal of
Urban Economics 68(1), 56-71 (2010). - "Missed opportunities: Optimal investment timing when information is
costly". Journal of Financial and Quantitative Analysis 42(2), 467-488
(2007). - "Regulating infrastructure: The impact on risk and investment". Journal
of Economic Literature 44, 921-968 (2006). - "Hedging the value of waiting" (with Glenn Boyle). Journal of Banking
and Finance 30(4), 1245-1267 (2006). - "The optimal design of interest rate target changes" (with Julian
Wright). Journal of Money, Credit and Banking 36(1), 115-138 (2004). - "Investment, uncertainty, and liquidity" (with Glenn Boyle). Journal of
Finance 58(5), 2143-2166 (2003). - "Open mouth operations" (with Julian Wright). Journal of Monetary
Economics 46(2), 489-516 (2000).
Other journal articles
- "Regulated prices and real options". Telecommunications Policy
(forthcoming). - "An examination of Frank Wolak's model of market power and its
application to the New Zealand electricity market" (with Lew Evans).
New Zealand Economic Papers 46(1), 25-34 (2012). - "A note on operating leverage and expected rates of return". Finance
Research Letters 8, 88-100 (2011). - "Learning options and binomial trees". Wilmott Journal: The
International Journal of Innovative Quantitative Finance 3(1), 1-23 (2011). - "Estimating implied valuation parameters for illiquid assets" (with Glenn
Boyle and Neil Quigley). Accounting and Finance 49(3), 465-479 (2009). - "Carbon subsidies, taxes, and optimal forest management" (with
Dinesh Kumareswaran). Environmental and Resource Economics 43(2),
275-293 (2009). - "How options provided by storage affect electricity prices" (with Lew
Evans). Southern Economic Journal 75(3), 681-702 (2009). - "Assessing the integration of electricity markets using principal
component analysis: Network and market structure effects" (with Lew
Evans and Steen Videbeck). Contemporary Economic Policy 26(1), 145-
161 (2008). - "Electricity spot price dynamics: Beyond financial models'' (with Steen
Videbeck). Energy Policy 35(11), 5614-5621 (2007). - "Competing payment schemes" (with Julian Wright). Journal of
Industrial Economics 55(1), 33-67 (2007). - "Pricing access: Forward versus backward looking cost rules" (with
John Small and Julian Wright). European Economic Review 50(7), 1767-
1789 (2006). - "A dynamic theory of cooperatives: The link between efficiency and
valuation" (with Lew Evans). Journal of Institutional and Theoretical
Economics 162(2), 364-383 (2006). - "Incentive regulation of prices when costs are sunk" (with Lew Evans).
Journal of Regulatory Economics 29(3), 239-264 (2006). - "Payback without apology" (with Glenn Boyle). Accounting and Finance
46(1), 1-10 (2006). - "Reply to the comments of Duckworth and Lewis" (with Michael Carter).
Journal of the Operational Research Society 56, 1337-1341 (2005). - "Human capital and popular investment advice" (with Glenn Boyle).
Review of Finance 9(2), 139-164 (2005). - "Risk, price regulation, and irreversible investment" (with Lew Evans).
International Journal of Industrial Organization 23, 109-128 (2005). - "Cricket interruptus: Fairness and incentive in limited overs cricket
matches" (with Michael Carter). Journal of the Operational Research
Society 55(8), 822-829 (2004). - "Cash flow immediacy and the value of investment timing" (with Glenn
Boyle). Journal of Financial Research 26(4), 553-570 (2003). - "Testing the expectations theory of the term structure for New
Zealand" (with Julian Wright and Jun Yu). New Zealand Economic Papers
33(1), 93-114 (1999). - "User charges for internet: The New Zealand experience" (with Michael
Carter). Telecommunications Systems 6, 301-313 (1996). - "Recursion operators and nonlocal symmetries". Proceedings of the
Royal Society of London, Series A 446, 107-114 (1994). - "More nonlocal symmetries of the KdV equation". Journal of Physics A:
Mathematical and General 26, L905-L908 (1993). - "Nonlocal symmetries of the KdV equation" (with Mark Hickman).
Journal of Mathematical Physics 344, 193-205 (1993).
Recent research
"U.S. house prices: The role of
fundamentals" (with Lew Evans) This
paper uses a competitive-equilibrium
housing-market model to evaluate the
role that interest rates played in the US
housing boom and bust. The model
features stochastic construction costs,
disposable income, interest rates, and
population, and endogenously
determines the supply of developed
land and house prices. It is calibrated
separately to 95 cities and data on the
four state variables alone are used to
calculate house prices implied by
fundamentals for each city. Actual
prices during 1995-2010 closely match
the predicted prices implied by
observed changes in the four state
variables and reasonably small
perceived changes in the long-run
average levels of interest rates and
demand growth rates.
"The role of storage in a competitive
electricity market and the effects of
climate change" (with Lew Evans and
Andrea Lu) This paper uses a new
model of a competitive electricity
market to investigate the role of
storage in markets dominated by hydro
generation. Competition amongst
generators leads to an endogenous
shadow price of stored water, which
facilitates the efficient intra-day and
inter-season substitution of fuel.
Overall welfare depends on storage
capacity, the cost structure of non-
hydro generators, and the
characteristics of water inflows. If
climate change reduces the long-run
average level of inflows or leads to the
introduction of a carbon tax then
overall welfare will fall and the
profitability of generators will rise. The
welfare benefits from additional
storage capacity will increase if climate
change makes long-term inflows less
predictable or leads to the introduction
of a carbon tax. They will decrease if
average inflows fall or the predictable
seasonal cycle in inflows becomes less
pronounced.
"Commodity prices and the option
value of storage" (with Lew Evans)
We incorporate a friction into the
standard competitive storage model of
commodity prices and derive equilibrium
storage policies and spot prices. The
friction introduces an element of
irreversibility to storage decisions,
which leads to periods when storage
operators do not trade in the spot
market and spot-price volatility is
substantially greater than normal. It
also drives a wedge between the spot
price and the market value of the
stored commodity. When the return on
storage is correctly measured using the
market value of the stored commodity,
instead of the spot price, the
convenience yield is zero except during
stock-outs. However, when the return
from storage is incorrectly calculated
using the spot price, the convenience
yield is nonzero in the no-trade
region.
"U.S. house prices: The role of
fundamentals" (with Lew Evans) This
paper uses a competitive-equilibrium
housing-market model to evaluate the
role that interest rates played in the US
housing boom and bust. The model
features stochastic construction costs,
disposable income, interest rates, and
population, and endogenously
determines the supply of developed
land and house prices. It is calibrated
separately to 95 cities and data on the
four state variables alone are used to
calculate house prices implied by
fundamentals for each city. Actual
prices during 1995-2010 closely match
the predicted prices implied by
observed changes in the four state
variables and reasonably small
perceived changes in the long-run
average levels of interest rates and
demand growth rates.
- Download the paper
"The role of storage in a competitive
electricity market and the effects of
climate change" (with Lew Evans and
Andrea Lu) This paper uses a new
model of a competitive electricity
market to investigate the role of
storage in markets dominated by hydro
generation. Competition amongst
generators leads to an endogenous
shadow price of stored water, which
facilitates the efficient intra-day and
inter-season substitution of fuel.
Overall welfare depends on storage
capacity, the cost structure of non-
hydro generators, and the
characteristics of water inflows. If
climate change reduces the long-run
average level of inflows or leads to the
introduction of a carbon tax then
overall welfare will fall and the
profitability of generators will rise. The
welfare benefits from additional
storage capacity will increase if climate
change makes long-term inflows less
predictable or leads to the introduction
of a carbon tax. They will decrease if
average inflows fall or the predictable
seasonal cycle in inflows becomes less
pronounced.
- Download the paper
"Commodity prices and the option
value of storage" (with Lew Evans)
We incorporate a friction into the
standard competitive storage model of
commodity prices and derive equilibrium
storage policies and spot prices. The
friction introduces an element of
irreversibility to storage decisions,
which leads to periods when storage
operators do not trade in the spot
market and spot-price volatility is
substantially greater than normal. It
also drives a wedge between the spot
price and the market value of the
stored commodity. When the return on
storage is correctly measured using the
market value of the stored commodity,
instead of the spot price, the
convenience yield is zero except during
stock-outs. However, when the return
from storage is incorrectly calculated
using the spot price, the convenience
yield is nonzero in the no-trade
region.
- Download the paper
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