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 investment. These models are widely utilized in capital budgeting 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 manufacturing activity. 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 Geary Institute, University College Dublin in its series Working Papers with number 201004.
Length: 38 pages
Date of creation: 01 Jan 2010
Date of revision:
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," Discussion Paper Series 2010_05, Department of Economics, University of Macedonia, revised Apr 2010.
- G1 - Financial Economics - - General Financial Markets
- G3 - Financial Economics - - Corporate Finance and Governance
- F3 - International Economics - - International Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-BEC-2010-04-17 (Business Economics)
- NEP-ENE-2010-04-17 (Energy Economics)
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