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Oil price volatility and real options: 35 years of evidence
Author(s) -
Elder John
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22057
Subject(s) - volatility (finance) , economics , oil price , monetary economics , implied volatility , investment (military) , financial economics , econometrics , politics , political science , law
Abstract There has been a surge in interest in the effects of uncertainty on investment decisions, motivated at least in part by the theory of real options. For example, Bloom (2009, Econometrica , 77 , 623–685) shows that higher uncertainty causes firms to temporarily pause investment and hiring, generating sharp economic downturns. This paper investigates these effects by examining the response of disaggregated measures of production to volatility in oil prices. We find that increased oil price volatility has strong negative effects on the production of durable goods, such as transportation equipment, and oil exploration, such as the drilling of oil and gas wells.