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The effect of oil price volatility on strategic investment

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  • Henriques, Irene
  • Sadorsky, Perry
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    Abstract

    In this paper, we investigate how oil price volatility affects the strategic investment decisions of a large panel of US firms. This paper uses key insights from the real options literature to develop a model of a company's strategic investment and shows how changes in oil price volatility can impact strategic investment decisions. The model is estimated using recently developed generalized method of moment estimation techniques for panel data sets. Empirical results are presented to show that there is a U shaped relationship between oil price volatility and firm investment. This is consistent with the predictions from the strategic growth options literature. The results should be useful to decision makers, investors, managers, policy makers and others who need to make strategic investment decisions in an uncertain world.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 33 (2011)
    Issue (Month): 1 (January)
    Pages: 79-87

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    Handle: RePEc:eee:eneeco:v:33:y:2011:i:1:p:79-87

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Oil prices Real options Strategic investments Volatility;

    References

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    Cited by:
    1. Xavier Labandeira & Baltasar Manzano, 2012. "Some Economic Aspects of Energy Security," Working Papers 09-2012, Economics for Energy.
    2. Stavros Degiannakis & George Filis & Renatas Kizys, 2013. "Oil price shocks and stock market volatility: evidence from European data," Working Papers 161, Bank of Greece.
    3. Wei, Yu, 2012. "Forecasting volatility of fuel oil futures in China: GARCH-type, SV or realized volatility models?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(22), pages 5546-5556.
    4. Chen, Shiu-Sheng & Hsu, Kai-Wei, 2012. "Reverse Globalization: Does High Oil Price Volatility Discourage International Trade?," MPRA Paper 36182, University Library of Munich, Germany.

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