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Equilibrium Exhaustible Resource Price Dynamics

  • Murray Carlson
  • Zeigham Khokher
  • Sheridan Titman

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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