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On the Decision Relevance of Stochastic Oil Price Models: A Case Study

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  • Robert Hammond
  • J. Bickel

Abstract

Stochastic price models may aid decision making when accurate project valuations are important. However, little consideration has been given to their usefulness in decision contexts that are concerned primarily with project rankings. In this article, we distinguish between valuation decisions and ranking decisions and quantify the degree to which differing stochastic oil price models result in different portfolio choices. We show that, within the confines of our example, differing models can result in very different valuations while at the same time having little impact on decision making.

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  • Robert Hammond & J. Bickel, 2013. "On the Decision Relevance of Stochastic Oil Price Models: A Case Study," The Engineering Economist, Taylor & Francis Journals, vol. 58(3), pages 209-230.
    • Handle: RePEc:taf:uteexx:v:58:y:2013:i:3:p:209-230
    DOI: 10.1080/0013791X.2013.806975
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    Cited by:

    1. Nadarajah, Selvaprabu & Secomandi, Nicola, 2023. "A review of the operations literature on real options in energy," European Journal of Operational Research, Elsevier, vol. 309(2), pages 469-487.

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