Oil Price Uncertainty
42 PagesPosted: 14 Jun 2006Last revised: 3 Mar 2010
Date Written: March 1, 2010
The theories of investment under uncertainty and real options predict that uncertainty about, for example, oil prices will tend to depress current investment.
We reinvestigate the relationship between the price of oil and investment, focusing on the role of uncertainty about oil prices. We find that volatility in oil prices has had a negative and statistically significant effect on several measures of investment, durables consumption and aggregate output.
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We also find that accounting for the effects of oil price volatility tends to exacerbate the negative dynamic response of economic activity to a negative oil price shock, while dampening the response to a positive oil price shock.
Keywords: Real Options, Oil Volatility, Vector autoregression, Multivariate GARCH-in-Mean VAR.
JEL Classification: G31, E32, C32
Suggested Citation:Suggested Citation
Elder, John and Serletis, Apostolos, Oil Price Uncertainty (March 1, 2010).
Journal of Money, Credit, and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=908675