Real Options Investment Under Uncertainty Oil

Real options investment under uncertainty oil

Oil Price Uncertainty

42 PagesPosted: 14 Jun 2006Last revised: 3 Mar 2010

Date Written: March 1, 2010

Abstract

The theories of investment under uncertainty and real options predict that uncertainty about, for example, oil prices will tend to depress current investment.

Real options investment under uncertainty oil

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).

Real options investment under uncertainty oil

Journal of Money, Credit, and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=908675

Real options investment under uncertainty oil