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Oil price volatility and real options: 35 years of evidence

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  • John Elder

Abstract

There has been a surge in interest in the effects of uncertainty on investment decisions, motivated at least in part by the theory of real options. For example, Bloom (2009, Econometrica, 77, 623–685) shows that higher uncertainty causes firms to temporarily pause investment and hiring, generating sharp economic downturns. This paper investigates these effects by examining the response of disaggregated measures of production to volatility in oil prices. We find that increased oil price volatility has strong negative effects on the production of durable goods, such as transportation equipment, and oil exploration, such as the drilling of oil and gas wells.

Suggested Citation

  • John Elder, 2019. "Oil price volatility and real options: 35 years of evidence," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(12), pages 1549-1564, December.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:12:p:1549-1564
    DOI: 10.1002/fut.22057
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    References listed on IDEAS

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    Cited by:

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    2. Chen, Lingtao & Yuan, Yongna & Zhao, Na, 2022. "The effect of oil price uncertainty on corporate investment in the presence of growth options: Evidence from listed companies in China (1998–2019)," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    3. Qin Zhang & Jin Boon Wong, 2023. "The influence of oil price uncertainty on stock liquidity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(2), pages 141-167, February.
    4. Nima Ebrahimi & Craig Pirrong, 2020. "Oil jump risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(8), pages 1282-1311, August.
    5. Ma, Xiaohan, 2023. "Oil uncertainty and the price-cost markup: Evidence from U.S. data," Energy Economics, Elsevier, vol. 124(C).
    6. Maghyereh, Aktham & Abdoh, Hussein, 2020. "Asymmetric effects of oil price uncertainty on corporate investment," Energy Economics, Elsevier, vol. 86(C).
    7. Śmiech, Sławomir & Papież, Monika & Rubaszek, Michał & Snarska, Małgorzata, 2021. "The role of oil price uncertainty shocks on oil-exporting countries," Energy Economics, Elsevier, vol. 93(C).
    8. Jin Boon Wong & Qin Zhang, 2020. "Impact of international energy prices on China's industries," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(5), pages 722-748, May.
    9. Elder, John, 2021. "Canadian industry level production and energy prices," Energy Economics, Elsevier, vol. 99(C).
    10. Qin Zhang & Jin Boon Wong, 2022. "Do oil shocks impact stock liquidity?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 472-491, March.
    11. Asad Dossani & John Elder, 2024. "Uncertainty and investment: Evidence from domestic oil rigs," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(2), pages 323-340, February.
    12. Gürkan Bozma & Murat Akadg & Rahman Aydin, 2021. "Dynamic Relationships between Oil Price, Inflation and Economic Growth: A VARMA, GARCH-in-mean, asymmetric BEKK Model for Turkey," Economics Bulletin, AccessEcon, vol. 41(3), pages 1266-1281.

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