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Alternative Models of Uncertain Commodity Prices for Use with Modern Asset Pricing Methods

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  • Malcolm P. Baker
  • E. Scott Mayfield
  • John E. Parsons

Abstract

This paper provides an introduction to alternative models of uncertain commodity prices. A model of commodity price movements is the engine around which any valuation methodology for commodity production projects is built, whether discounted cash flow (DCF) models or the recently developed modern asset pricing (MAP) methods. The accuracy of the valuation is in part dependent on the quality of the engine employed. This paper provides an overview of several basic commodity price models and explains the essential differences among them. We also show how futures prices can be used to discriminate among the models and to estimate better key parameters of the model chosen.

Suggested Citation

  • Malcolm P. Baker & E. Scott Mayfield & John E. Parsons, 1998. "Alternative Models of Uncertain Commodity Prices for Use with Modern Asset Pricing Methods," The Energy Journal, , vol. 19(1), pages 115-148, January.
    • Handle: RePEc:sae:enejou:v:19:y:1998:i:1:p:115-148
    DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No1-5
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    References listed on IDEAS

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    1. Gordon Salahor, 1998. "Implications of Output Price Risk and Operating Leverage for the Evaluation of Petroleum Development Projects," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 13-46.
    2. Paul G. Bradley, 1998. "On the Use of Modern Asset Pricing for Comparing Alternative Royalty Systems for Petroleum Development Projects," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 47-81.
    3. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    4. Malcolm P. Baker & E. Scott Mayfield & John E. Parsons, 1998. "Alternative Models of Uncertain Commodity Prices for Use with Modern Asset Pricing Methods," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 115-148.
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