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Comparative statics for real options on oil: What stylized facts?

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  • Diderik Lund
  • Ragnar Nymoen

Abstract

An important application in the real options literature has been in investments in the oil sector. Two commonly applied “stylized facts” in such applications are tested here. One is that the correlation of the returns on oil and the stock market is positive; the other that it is invariant to changes in oil price volatility. Both are rejected in data for 1993–2008 for crude oil and Standard & Poor's 500 stock market index. Based on real options theory, consequences are pointed out. The widespread idea that higher volatility leads to increased value and postponed investment is not necessarily valid.

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  • Diderik Lund & Ragnar Nymoen, 2018. "Comparative statics for real options on oil: What stylized facts?," The Engineering Economist, Taylor & Francis Journals, vol. 63(1), pages 54-65, January.
    • Handle: RePEc:taf:uteexx:v:63:y:2018:i:1:p:54-65
    DOI: 10.1080/0013791X.2017.1283001
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    Cited by:

    1. Ewald, Christian Oliver & Taub, Bart, 2022. "Real options, risk aversion and markets: A corporate finance perspective," Journal of Corporate Finance, Elsevier, vol. 72(C).
    2. Comincioli, Nicola & Hagspiel, Verena & Kort, Peter M. & Menoncin, Francesco & Miniaci, Raffaele & Vergalli, Sergio, 2021. "Mothballing in a Duopoly: Evidence from a (Shale) Oil Market," Energy Economics, Elsevier, vol. 104(C).
    3. 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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