Oil Volatility and the Option Value of Waiting: An analysis of the G-7
AbstractThere has recently been considerable interest in the potential adverse effects associated with excessive uncertainty in energy futures markets. Theoretical models of investment under uncertainty predict that increased uncertainty will tend to induce firms to delay production and investment. These models are widely utilized in capital budgeting and production decisions, particularly in the energy sector. There is relatively little empirical evidence, however, on whether such channels have industry-wide effects. Using a sample of G7 countries we examine whether uncertainty about a prominent commodity – oil – affects the time series variation in production in energy intensive industries. Our primary result is consistent with the predictions of real options theory – uncertainty about oil prices has had a negative and significant effect on manufacturing activity in Canada, France, UK and US.
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Bibliographic InfoPaper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2010_05.
Date of creation: Apr 2010
Date of revision: Apr 2010
Oil; Volatility; Vector autoregression; Multivariate GARCH-in-Mean VAR;
Other versions of this item:
- Don Bredin & John Elder & Stilianos Fountas, 2010. "Oil Volatility and the Option Value of Waiting: An analysis of the G-7," Working Papers 201004, Geary Institute, University College Dublin.
- G1 - Financial Economics - - General Financial Markets
- G3 - Financial Economics - - Corporate Finance and Governance
- F3 - International Economics - - International Finance
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- Van Robays, Ine, 2012.
"Macroeconomic uncertainty and the impact of oil shocks,"
Working Paper Series
1479, European Central Bank.
- Ine Van Robays, 2012. "Macroeconomic Uncertainty and the Impact of Oil Shocks," CESifo Working Paper Series 3937, CESifo Group Munich.
- Soojin Jo, 2012. "The Effects of Oil Price Uncertainty on the Macroeconomy," Working Papers 12-40, Bank of Canada.
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