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Evaluating Natural Resource Investments under Different Model Dynamics: Managerial Insights
Author(s) -
Tsekrekos Andrianos E.,
Shackleton Mark B.,
Wojakowski Rafał
Publication year - 2012
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2010.00544.x
Subject(s) - valuation (finance) , economics , volatility (finance) , commodity , convenience yield , microeconomics , natural resource , yield (engineering) , value (mathematics) , natural resource economics , econometrics , industrial organization , financial economics , spot contract , finance , computer science , ecology , materials science , machine learning , metallurgy , biology , futures contract
We focus on factors that drive the dynamics of commodity prices. We highlight the capital budgeting implications of three highly‐cited, nested, multi‐factor models for commodity prices that have been successful in empirical investigations. Competing assumptions regarding commodity prices and their convenience yields can account for differences close to 40% on average, and in excess of 60% in cases, in the valuation of typical natural resource investments. These value differences are found to increase with the maturity and the intrinsic value of the investment, and also with the level and the volatility of the resource's convenience yield. Resources such as oil or copper, that are used for production purposes, usually exhibit high and volatile convenience yields; thus our findings should be more relevant for decision‐makers in such sectors.