stochastic convenience yield and the pricing of oil contingent claims this paper develops and empirically tests a two factor model for pricing financial and real assets contingent on the price of oil the factors are the spot price of oil and the instantaneous convenience yield the parameters of the model are estimated using weekly oil futures contract prices from january 1984 to november 1988 and the model s performance is assessed out of sample by valuing futures contracts over the period november 1988 to may 1989 finally the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

oil prices inflation and interest rates in a structural cointegrated var model for the g 7 countries sharp increases in the price of oil are generally seen as a major contributor to business cycle asymmetries moreover the very recent highs registered in the world oil market are causing concern about possible slowdowns in the economic performance of the most developed countries in this paper a structural cointegrated var model has been considered for the g 7 countries in order to study the direct effects of oil price shocks on output and prices and the reaction of monetary variables to external shocks our results can be summarized as follows i a stationary money demand as suggested by the classic theory of money can be identified for most countries ii according to the estimated coefficients of the structural part of the model for all countries except japan and u k the null hypothesis of an influence of oil prices on the inflation rate cannot be rejected inflation rate shocks are transmitted to the real economy by increasing interest rates iii impulse response analysis suggests for most countries the existence of an instantaneous temporary effect of oil price innovations on prices iv impulse response functions indicate different monetary policy reactions to inflationary and growth shocks v the simulation exercises directed to estimate the total impact of the 1990 oil price shock indicate that for some countries u s a significant part of the effects of the oil price shock is due to the monetary policy reaction function for other countries canada france and italy however the total impact is offset at least in part by an easing of monetary conditions

pricing used products for remanufacturing remanufacturing is one of recovery options for used products as remanufacturing requires a continuous supply of used products the economic incentive is required to attract customers to return their used products called cores and the problem of pricing a core becomes an important issue such a pricing problem is analogous to pricing an option which can be used to sell the remanufactured cores called core products as sales price of core products follows a geometric brownian motion we propose a model here to evaluate the acquisition price of cores this model links core acquisition price with the sale price of core product but assumes other costs such as logistics and remanufacturing to be deterministic we have presented a numerical example to show its applicability since the model proposed here is generic it is believed that the proposed model can be used in setting the core prices in many situations

geometric brownian motion and structural breaks in oil prices a quantitative analysis the purpose of this paper is to present a quantitative analyses of oil price s path we try to argue that despite its parsimony and simplicity geometric brownian motion can perform well as a proxy for the movement of oil prices and for a state variable to evaluate oil deposits we base our argument on evidences of very low speed of mean reverting or long half life since unit root tests only can reject its null hypothesis in a sample longer than 100 years on the other hand we reject the null hypothesis of unit root with two endogenous breaks showing that the usual rejection can be attributed to omitted structural breaks we conclude that the average half life of oil price between 4 and 8 years depending on the model chosen is long enough to allow a good approximation as a geometric brownian motion

are oil shocks permanent or temporary panel data evidence from crude oil and ngl production in 60 countries this paper examines the unit root properties of crude oil production for 60 countries employing a range of panel data unit root tests for the period 1971 to 2003 the study first employs a number of panel data tests that do not accommodate structural breaks and then proceeds to apply the lagrange multiplier lm panel unit root test with one structural break the results of the panel data tests without a structural break are inconclusive with at best mixed support for joint stationarity the findings from the lm panel unit root test with a structural break however are conclusive suggesting that for a world panel and smaller regional based panels crude oil and ngl production are jointly stationary

managing domestic differences in international negotiations the strategic use of internal side payments when nations negotiate often the toughest bargaining is not between nations but within them the reason is simple proposed international agreements no matter how much in the national interest inevitably have differential effects on factional concerns threatening to make winners of some and losers of others potential losers often have the power to prevent agreements not to their liking thereby limiting what is possible in international negotiations this article uses a negotiation analytic framework to analyze the consequences of such limits it argues that limits need not be a liability for a divided country under some circumstances they may provide a bargaining advantage and demonstrates circumstances under which intracountry differences are desirable and undesirable from a national perspective more specifically the article shows that the effect of domestic differences on international negotiations depends on the configuration of domestic interests on the nature of domestic political processes and on characteristics of the international bargain it then explores a particular dimension of the domestic process the ability to link issues which allow factions to make internal side payments it demonstrates that internal issue linkage can have profound effects on the external bargain and explores the strategic implications of side payments for those who would manage domestic differences in international negotiations

an identification robust test for time varying parameters in the dynamics of energy prices summary we test for the presence of time varying parameters tvp in the long run dynamics of energy prices for oil natural gas and coal within a standard class of mean reverting models we also propose residual based diagnostic tests and examine out of sample forecasts in sample lr tests support the tvp model for coal and gas but not for oil though companion diagnostics suggest that the model is too restrictive to conclusively fit the data out of sample analysis suggests a random walk specification for oil price and tvp models for both real time forecasting in the case of gas and long run forecasting in the case of coal copyright 2010 john wiley sons ltd

detecting instability in the volatility of carbon prices this article investigates the presence of outliers in the volatility of carbon prices we compute three different measures of volatility for european union allowances based on daily data egarch model option prices implied volatility and intraday data realized volatility based on the methodology developed by zeileis et al 2003 and zeileis 2006 we detect instability in the volatility of carbon prices based on two kinds of tests retrospective tests ols recursive based cusum processes f statistics and residual sum of squares and forward looking tests by monitoring structural changes recursively or with moving estimates we show evidence of strong shifts mainly for the egarch and iv models during the time period overall we suggest that yearly compliance events and growing uncertainties in post kyoto international agreements may explain the instability in the volatility of carbon prices

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

why do oil prices jump or fall this paper discusses theories that can explain the zig zags of oil prices in general and in particular the recent jump more precisely the following explanations are discussed homo oeconomicus pure profit maximization if demand is dynamic and convex price reaction function price increases and respectively declines depend on capacity utilization cartelization contingent on output or revenues of which the latter can lead to backward bending supply segments and multiple equilibria statistical descriptions mean reversion homo politicus i e arguments for price hikes that are rational public choice despite the long run economic loss finally two approaches are presented that emphasize demand uncertainty one extending the above mentioned dynamic demand framework and the other considers a dynamic game of non competitive suppliers with lumpy investments summing up a demand shock seems to be the most suitable explanation of today s high prices indeed a shock given that international energy agency iea and department of energy doe were promising just a couple of years ago that we are going to have lots of oil at low prices while others and in particular politics have surprisingly little or no explanatory power

oil price dynamics 2002 2006 abstract oil price dynamics during 2002 2006 have been characterized by high volatility high intensity jumps and strong upward drift and were concomitant with underlying fundamentals of oil markets and world economy namely pressure on oil prices resulting from rigid crude oil supply and expanding world demand for crude oil a change in the oil price process parameters would require a change in underlying fundamentals market expectations extracted from call and put option prices anticipated no change in underlying fundamentals in the short term markets expected oil prices to remain volatile and jumpy and with higher probabilities to rise rather than fall above the expected mean

estimating the influence of u s ethanol policy on plant investment decisions a real options analysis with two stochastic variables abstract u s ethanol policies have contributed to changes in the levels and the volatilities of revenues and costs facing ethanol firms the implications of these policies for optimal investment behavior are investigated through an extension of the real options framework that allows for the consideration of volatility in both revenue and cost components as well as the correlation between them the effects of policy affecting plant revenues dominate the effects of those policies affecting production costs in the absence of these policies much of the recent expansionary periods would have not existed and market conditions in the late 1990s would have led to some plant closures we also show that regardless of plant size u s ethanol policy has narrowed the distance between the optimal entry and exit curves implying a more narrow range of inactivity and indicative of a more volatile evolution for the industry than would have existed otherwise

estimating and forecasting the real prices of crude oil a data rich model using a dynamic model averaging dma approach given that oil price fluctuations have been of great interest for macroeconomics in the recent years due to its important implications for future inflation economic growth and policy making the aim of this paper is to estimate and forecast west texas intermediate wti crude oil prices using a large monthly dataset that covers the period from march 1983 to december 2011 to achieve this aim forecasting with factor models offers a usual approach that utilizes large datasets however a forecasting model which simply includes all factors in state space equation and does not allow for time varying may be not suitable with a highly volatile market such as oil market to overcome these limitations an approach that accounts both for parameter and model uncertainty is employed in particular this study uses the dynamic model averaging dma approach suggested by koop and korobilis 2012 the key element of the dma approach is that it allows both for model and parameter to vary at each point of time by doing so the dma is robust to structural breaks empirical findings show that dma approach outperforms any other alternative model used in the forecasting exercise results also show that there is model but not parameter variation in this oil price forecasting exercise finally the findings suggest that the dma approach provides a better proxy of expected spot prices than future prices

valuation of commodity futures and options under stochastic convenience yields interest rates and jump diffusions in the spot this paper investigates the effects of stochastic convenience yields stochastic interest rates and jumps in the spot price on the pricing of commodity futures forwards and futures options numerical examples show that one factor prices differ materially from the stochastic convenience yield two factor prices when convenience yield is considerably above its long term average the extension to a three factor model with stochastic interest rates leads to a different futures price but the forward price is unchanged the extension ofthe three factor model to include jumps in the spot price process does not affect forward or futures prices but it can have an impact on options prices the model is applied to price the present value of future cash flows from a real asset

study on carbon capture and storage ccs investment decision making based on real options for china s coal fired power plants in this paper a quadrinomial model based on the theory of real options is developed to evaluate the investment in carbon capture and storage ccs retrofitting for existing coal fired power plants in china uncertainties in carbon price fossil fuel price investment cost and government subsidy are considered an existing typical 600 mw supercritical pulverized coal fired scpc plant is taken as a case study to illustrate the proposed model and the effects of government subsidy under different scenarios on the critical carbon price to invest in ccs are analyzed the results indicate that the real options approach has an advantage over the application of traditional net present value npv method when handling uncertainty and government subsidy has significant effects on reducing critical carbon price for investment in ccs the critical carbon prices are 103 56 rmb ton with 100 subsidy and 217 95 rmb ton without subsidy while the current average carbon price is 85 2 rmb ton this means that the current trading environment is not positive enough to attract investment in ccs retrofitting these conclusions provide theoretical foundation for decision making of ccs investment and related policy making

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

trends in world energy prices the correct identification of the time series path of non renewable energy resources has far reaching consequences for economists and policymakers alike this study builds on the existing literature by employing a data series that includes a sample period of institutional change and recently developed unit root testing procedures besides crude oil natural gas and coal prices are also examined aiming to further the knowledge of non renewable energy resource time paths in order to inform future research and update the conclusions of past studies the unit root tests allow for structural breaks and are based on the procedures developed by zivot and andrews 1992 lumsdaine and papell 1997 and lee and strazicich 2003 finally we investigate whether the trend changes signs in the regimes which are bounded by the structural breaks and quantify the prevalence of the trends over the sample period considered the results show that the trend is not well represented by a single positive or negative trend the variability of the trend suggests that forecasting energy prices should not typically occur about a single trend

off shore enhanced oil recovery in the north sea the impact of price uncertainty on the investment decisions although co2 capture and storage ccs is considered a key solution for co2 emission mitigation it is currently not economically feasible co2 enhanced oil recovery can play a significant role in stimulating ccs deployment because co2 is used to extract additional quantities of oil this study analyzes the investment decision of both a carbon emitting source and an oil company separately by adopting a real options approach it is shown that when uncertainty is integrated in the economic analysis co2 and oil price threshold levels at which investments in co2 capture and enhanced oil recovery will take place are higher than when a net present value approach is adopted we also demonstrate that a tax on co2 instead of an emission trading system results in a lower investment threshold level for the investment in the co2 capture unit furthermore we determine a minimum co2 selling price between the two firms and show that co2 eor has the potential to pull ccs into the market by providing an additional revenue on the capture plant however when co2 permit prices are above an identifiable level the eu ets does not necessarily result in the adoption of ccs and stimulates oil production

waiting to invest investment and uncertainty the textbook analysis that accepts all projections with positive net present values as positive is quite generally wrong the ability to delay a project means that almost every project competes with itself postponed with uncertain interest rates even the simplest of projects has an option value the effect of interest rate uncertainty on the optimal delay of investment is sizable this implies that the rate of aggregate investment will depend on both the level of the real interest rate and the degree of interest rate uncertainty furthermore it is not necessarily true that investment rises with a fall in interest rates copyright 1992 by university of chicago press

neutrality and efficiency of petroleum revenue tax a theoretical assessment we use an irreversible investment model of oil development to show how a fiscal regime can be both neutral with respect to development decisions and efficient in recouping economic rents we find that there is a unique rate for calculating the tax deductibility of capital costs which ensures economic neutrality while tax efficiency involves high rates of tax on profits after these deductions using parameters of the uk petroleum revenue tax prt numerical calculations in our simplified model suggest that prt was both neutral and relatively efficient in conclusion the tax efficiency of prt is compared with that of a neutral resource rent tax

oil price hikes and development triggers in peace and war the theory of irreversible investment predicts that development of an oil field should take place when a unique price trigger is passed at the start of the 1990 91 gulf war however oil prices promptly doubled only to fall back to their previous level when peace returned six months later to incorporate such large but transitory price hikes we evaluate the profitability of an oil field contingent on war and peace and calculate separate triggers in each case for plausible parameter values we find that the switch between these development triggers is about 45 of the price hike caused by the war the price hike is therefore equivalent to a permanent price increase of only a quarter of its size copyright 1996 by royal economic society

unit root properties of crude oil spot and futures prices in this article we examine whether wti and brent crude oil spot and futures prices at 1 3 and 6 months to maturity contain a unit root with one and two structural breaks employing weekly data over the period 1991 2004 to realise this objective we employ lagrange multiplier lm unit root tests with one and two endogenous structural breaks proposed by lee and strazicich 2003 minimum lagrange multiplier unit root test with two structural breaks review of economics and statistics 85 1082 1089 2004 minimum lm unit root test with one structural break working paper no 04 17 department of economics appalachian state university we find that each of the oil price series can be characterised as a random walk process and that the endogenous structural breaks are significant and meaningful in terms of events that have impacted on world oil markets

market efficiency of oil spot and futures a mean variance and stochastic dominance approach this paper examines the market efficiency of oil spot and futures prices by using both mean variance mv and stochastic dominance sd approaches based on the west texas intermediate crude oil data for the sample period 1989 2008 we find no evidence of any mv and sd relationships between oil spot and futures indices this infers that there is no arbitrage opportunity between these two markets spot and futures do not dominate one another investors are indifferent to investing spot or futures and the spot and futures oil markets are efficient and rational the empirical findings are robust to each sub period before and after the crises for different crises and also to portfolio diversification

real income stagnation of countries 1960 2001 abstract this paper examines the phenomenon of real income stagnation in which real income growth is uninterruptedly negligible or negative for a sizable sequence of years we analyse data for four decades from a large cross section of countries real income stagnation is a conceptually distinct phenomenon from low average growth and other features of the growth sequence that have been previously considered we find that real income stagnation has affected a significant number of countries 103 out of 168 and resulted in substantial income loss countries that suffered spells of real income stagnation were more likely to be poor in latin america or sub saharan africa conflict ridden and dependent on primary commodity exports stagnation is also very likely to persist over time countries that were afflicted with stagnation in the 1960s had a likelihood of 75 per cent of also being afflicted with stagnation in the 1990s