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Equilibrium Exhaustible Resource Price Dynamics

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  • Murray Carlson
  • Zeigham Khokher
  • Sheridan Titman

Abstract

We develop equilibrium models of an exhaustible resource market where both prices and extraction choices are determined endogenously. Our analysis highlights a role for adjustment costs in generating price dynamics that are consistent with observed oil and gas forward prices as well as with the two-factor prices processes that were calibrated in Schwartz and Smith (2000). Stochastic volatility aries in our two-factor model as a natural consequence of production for oil and natural gas prices. Differences between the endogenous price processes considered in earlier papers can generate significant differences in both financial and real option values.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12000.

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Date of creation: Feb 2006
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Publication status: published as Carlson, Murray, Zeigham Khokher, and Sheridan Titman. "Equilibrium Exhaustible Resource Price Dynamics." Journal of Finance (2007).
Handle: RePEc:nbr:nberwo:12000

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  1. Caballero, R.J., 1994. "Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 94-32, Massachusetts Institute of Technology (MIT), Department of Economics.
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Cited by:
  1. Jaime Casassus & Diego Ceballos, 2010. "Correlation Structure between Inflation and Oil Futures Returns: An Equilibrium Approach," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 373, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. Annastiina Silvennoinen & Susan Thorp, 2010. "Financialization, Crisis and Commodity Correlation Dynamics," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 267, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Yang, Fan, 2013. "Investment shocks and the commodity basis spread," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 164-184.
  4. Jean-Francois Mercure & Pablo Salas, 2012. "On the global economic potentials and marginal costs of non-renewable resources and the price of energy commodities," Papers 1209.0708, arXiv.org, revised Jul 2013.
  5. Razvan Tudor, 2009. "Evidence of unspanned stochastic volatility in crude-oil market," Advances in Economic and Financial Research - DOFIN Working Paper Series, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB 33, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
  6. Colin A. Carter & Gordon C. Rausser & Aaron Smith, 2011. "Commodity Booms and Busts," Annual Review of Resource Economics, Annual Reviews, Annual Reviews, vol. 3(1), pages 87-118, October.
  7. Anders B. Trolle & Eduardo S. Schwartz, 2009. "Unspanned Stochastic Volatility and the Pricing of Commodity Derivatives," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(11), pages 4423-4461, November.

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