Comparative statics for real options on oil: What stylized facts to use?
AbstractComparative-statics results for financial options are often assumed to hold for real options. But the effects of higher volatility need not be increased value and postponed investment. This depends on signs of correlations and what parameters are held constant. For real options, the rate-of-return shortfall may change. The CAPM is commonly used to determine this. In contrast with widespread assumptions, the empirical analysis shows that the correlation of the returns on oil and the stock market is nonpositive and not invariant to changes in volatility. For crude oil during 1993–2008, these changes are identified as three significant breaks.
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Bibliographic InfoPaper provided by Oslo University, Department of Economics in its series Memorandum with number 14/2013.
Length: 24 pages
Date of creation: 27 May 2013
Date of revision:
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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
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More information through EDIRC
real options; oil; volatility; CAPM; comparative statics;
Find related papers by JEL classification:
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-13 (All new papers)
- NEP-CWA-2013-09-13 (Central & Western Asia)
- NEP-ENE-2013-09-13 (Energy Economics)
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