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Comparative statics for real options on oil: What stylized facts to use?

Author

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  • Lund, Diderik

    (Dept. of Economics, University of Oslo)

  • Nymoen, Ragnar

    (Dept. of Economics, University of Oslo)

Abstract

Comparative-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.

Suggested Citation

  • Lund, Diderik & Nymoen, Ragnar, 2013. "Comparative statics for real options on oil: What stylized facts to use?," Memorandum 14/2013, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2013_014
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    File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2013/memo-14-2013.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    real options; oil; volatility; CAPM; comparative statics;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - 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

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