Oil Volatility and the Option Value of Waiting: An analysis of the G-7

Don Bredin, John Elder and Stilianos Fountas

No 201004, Working Papers from Geary Institute, University College Dublin

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 investment. These models are widely utilized in capital budgeting decisions, particularly in the energy sector. There is relatively little empirical evidence, however, on whether such channels have industry-wide effects. Using a sample of G7 countries we examine whether uncertainty about a prominent commodity — oil — affects the time series variation in manufacturing activity. 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.

Keywords: Oil; Volatility; Vector autoregression; Multivariate GARCH-in-Mean VAR (search for similar items in EconPapers)
JEL-codes: F3 G1 G3 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-01-01
New Economics Papers: this item is included in nep-bec and nep-ene
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Citations: View citations in EconPapers (6)

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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201004.pdf First version, 2010 (application/pdf)

Related works:
Journal Article: Oil volatility and the option value of waiting: An analysis of the G‐7 (2011)
Working Paper: Oil Volatility and the Option Value of Waiting: An analysis of the G-7 (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ucd:wpaper:201004

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