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Oil volatility and the option value of waiting: An analysis of the G‐7

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  • Don Bredin
  • John Elder
  • Stilianos Fountas

Abstract

There 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 effects on industrial production. Using a sample of G7 countries we examine whether uncertainty about a prominent commodity—oil—affects the time series variation in industrial production. 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. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:679–702, 2011

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  • Don Bredin & John Elder & Stilianos Fountas, 2011. "Oil volatility and the option value of waiting: An analysis of the G‐7," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(7), pages 679-702, July.
  • Handle: RePEc:wly:jfutmk:v:31:y:2011:i:7:p:679-702
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    Citations

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    Cited by:

    1. Mehmet Balcilar & Zeynel Abidin Ozdemir, 2017. "The nexus between the oil price and its volatility in a stochastic volatility in mean model with time-varying parameters," Working Papers 15-33, Eastern Mediterranean University, Department of Economics.
    2. Ine Van Robays, 2016. "Macroeconomic Uncertainty and Oil Price Volatility," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(5), pages 671-693, October.
    3. Hachula, Michael & Hoffmann, Sebastian, 2015. "The output effects of commodity price volatility: Evidence from exporting countries," Discussion Papers 2015/29, Free University Berlin, School of Business & Economics.
    4. Soojin Jo, 2012. "The Effects of Oil Price Uncertainty on the Macroeconomy," Staff Working Papers 12-40, Bank of Canada.
    5. John Elder, Hong Miao, and Sanjay Ramchander, 2013. "Jumps in Oil Prices: The Role of Economic News," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    6. Wei Kang & David Penn & Joachim Zietz, 2015. "The response of state employment to oil price volatility," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 478-500, July.
    7. Van Robays, Ine, 2012. "Macroeconomic uncertainty and the impact of oil shocks," Working Paper Series 1479, European Central Bank.
    8. repec:eee:joecas:v:10:y:2013:i:1:p:10-20 is not listed on IDEAS
    9. Li, Lei & Yin, Libo & Zhou, Yimin, 2016. "Exogenous shocks and the spillover effects between uncertainty and oil price," Energy Economics, Elsevier, vol. 54(C), pages 224-234.
    10. Thiem, Christopher, 2017. "Oil price uncertainty and the business cycle: Accounting for the influences of global supply and demand within a VAR GARCH-in-mean framework," Ruhr Economic Papers 674, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    11. Stilianos Fountas & Panagiota Karatasi & Paraskevi Tzika, 2018. "Economic Policy Uncertainty in Greece: Measuring Uncertainty for the Greek Macroeconomy," Discussion Paper Series 2018_05, Department of Economics, University of Macedonia, revised Apr 2018.
    12. Libo Yin, 2016. "Does oil price respond to macroeconomic uncertainty? New evidence," Empirical Economics, Springer, vol. 51(3), pages 921-938, November.
    13. Mamothoana Difeto & Reneé van Eyden & Rangan Gupta & Mark E. Wohar, 2018. "Oil Price Volatility and Economic Growth: Evidence from Advanced OECD Countries using over One Century of Data," Working Papers 201813, University of Pretoria, Department of Economics.
    14. repec:eco:journ1:2017-02-16 is not listed on IDEAS
    15. Chi-Wei SU & Zong-Liang YAO & Hsu-Ling CHANG, 2016. "The relationship between output and asset prices: A time – and frequency – varying approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(606), S), pages 57-76, Spring.
    16. David Mueller, 2016. "The right to choose: political decisions and environmental investments," International Journal of Innovation and Sustainable Development, Inderscience Enterprises Ltd, vol. 10(3), pages 219-236.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance
    • F3 - International Economics - - International Finance

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