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Biodiesel as a Substitute for Petroleum Diesel in a Stochastic Environment

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  • Tareen, Irfan Y.
  • Wetzstein, Michael E.
  • Duffield, James A.

Abstract

The objective of the research presented in this paper is the development of a stochastic adoption threshold. The option pricing approach for modeling investment under uncertainty is extended for the case of comparing two stochastic input prices associated with inputs that are perfect substitutes in a production process. Based on this methodology, a threshold decision rule influenced by the drift and volatility of these two input prices is developed. Theoretical results establish an empirical link for measuring the tradeoff of a relatively more expensive input (biodiesel) with lower price drift and volatility compared with a lower but more volatile priced input (petroleum diesel).

Suggested Citation

  • Tareen, Irfan Y. & Wetzstein, Michael E. & Duffield, James A., 2000. "Biodiesel as a Substitute for Petroleum Diesel in a Stochastic Environment," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(2), pages 373-381, August.
    • Handle: RePEc:cup:jagaec:v:32:y:2000:i:02:p:373-381_02
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    Cited by:

    1. Antonina Kalinichenko & Valerii Havrysh & Igor Atamanyuk, 2019. "The Acceptable Alternative Vehicle Fuel Price," Energies, MDPI, vol. 12(20), pages 1-20, October.
    2. Ginder, Roger G. & Paulson, Nicholas D., 2006. "The Growth and Direction of the Biodiesel Industry in the US," 2006 Annual meeting, July 23-26, Long Beach, CA 21402, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Calum G. Turvey, 2010. "Biography," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(1), pages 5-20, May.
    4. Sener Salci & Glenn P. Jenkins, 2016. "Incorporating Risk and Uncertainty in Cost-Benefit Analysis," Development Discussion Papers 2016-09, JDI Executive Programs.
    5. Kostrova, Alisa & Britz, Wolfgang & Finger, Robert & Djanibekov, Utkur, 2016. "Real Options Approach And Stochastic Programming In Farm Level Analysis: The Case Of Short-Rotation Coppice Cultivation," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244864, German Association of Agricultural Economists (GEWISOLA).
    6. Serra, Teresa & Gil, José M., 2012. "Biodiesel as a motor fuel price stabilization mechanism," Energy Policy, Elsevier, vol. 50(C), pages 689-698.
    7. Treguer, David & Sourie, Jean-Claude & Rozakis, Stelios, 2005. "Questions of Costs About the French Bio-Fuel Sector by Year 2010," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24560, European Association of Agricultural Economists.
    8. Hanif, Waqas & Areola Hernandez, Jose & Shahzad, Syed Jawad Hussain & Yoon, Seong-Min, 2021. "Tail dependence risk and spillovers between oil and food prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 195-209.

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