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

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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.

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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 14/2013.

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Length: 24 pages
Date of creation: 27 May 2013
Date of revision:
Handle: RePEc:hhs:osloec:2013_014

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
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Web page: http://www.oekonomi.uio.no/indexe.html
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Keywords: real options; oil; volatility; CAPM; comparative statics;

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References

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