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88
An equilibrium model of investment under uncertainty
, 2002
"... This paper analyzes the optimal investment decisions of heterogeneous firms in a competitive, uncertain environment. We characterize firms’ optimal investment strategy explicitly, and derive a closed form solution for firm value. We show that in the strategic equilibrium real option premia are signi ..."
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Cited by 54 (2 self)
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This paper analyzes the optimal investment decisions of heterogeneous firms in a competitive, uncertain environment. We characterize firms’ optimal investment strategy explicitly, and derive a closed form solution for firm value. We show that in the strategic equilibrium real option premia are significant. As a result firms delay investment, choosing optimally not to undertake some positive NPV projects. The model predicts that firm returns vary over the business cycle, with returns negatively skewed during expansions but positively skewed in recessions.
2004): Volatility and commodity price dynamics
 The Journal of Futures Markets
"... Commodity prices are volatile, and volatility itself varies over time. Changes in volatility can affect market variables by directly affecting the marginal value of storage, and by affecting a component of the total marginal cost of production, the opportunity cost of producing the commodity now rat ..."
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Cited by 22 (0 self)
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Commodity prices are volatile, and volatility itself varies over time. Changes in volatility can affect market variables by directly affecting the marginal value of storage, and by affecting a component of the total marginal cost of production, the opportunity cost of producing the commodity now rather than waiting for more price information. I examine the role of volatility in shortrun commodity market dynamics and the determinants of volatility itself. I develop a structural model of inventories, spot, and futures prices that explicitly accounts for volatility, and estimate it using daily and weekly data for the petroleum complex: crude oil, heating oil, and gasoline.
Equilibrium Commodity Prices with Irreversible Investment and NonLinear Technologies
, 2005
"... We model equilibrium spot and futures oil prices in a general equilibrium production economy. In our model production of the consumption good requires two inputs: the consumption good and a commodity, e.g., Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil well ..."
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Cited by 21 (3 self)
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We model equilibrium spot and futures oil prices in a general equilibrium production economy. In our model production of the consumption good requires two inputs: the consumption good and a commodity, e.g., Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil wells is costly and irreversible. As a result in equilibrium, investment in Oil wells is infrequent and lumpy. Even though the state of the economy is fully described by a onefactor Markov process, the spot oil price is not Markov (in itself). Rather it is best described as a regimeswitching process, the regime being an investment ‘proximity’ indicator. The resulting equilibrium oil price exhibits meanreversion and heteroscedasticity. Further, the risk premium for exposure to commodity risk is timevarying, positive in the farfrominvestment regime but negative in the nearinvestment regime. Further, our model captures many of the stylized facts of oil futures prices, such as backwardation and the ‘Samuelson effect.’ The futures curve exhibits backwardation as a result of a convenience yield, which arises endogenously. We estimate our model using the Simulated Method of
Equilibrium exhaustible resource price dynamics
 Journal of Finance
"... We develop equilibrium models of exhaustible resource markets with endogenous extraction choices and prices. Our analysis demonstrates how adjustment costs can generate oil and gas forward price dynamics with twofactors, consistent with the behavior these commodities exhibit in the Schwartz and S ..."
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Cited by 16 (0 self)
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We develop equilibrium models of exhaustible resource markets with endogenous extraction choices and prices. Our analysis demonstrates how adjustment costs can generate oil and gas forward price dynamics with twofactors, consistent with the behavior these commodities exhibit in the Schwartz and Smith (2000) calibration. Our twofactor model predicts that stochastic volatility will arise in these markets as a natural consequence of production adjustments, however, and we provide supporting empirical evidence. Differences between endogenous price processes from our general equilibrium model and exogenous processes in earlier papers can generate significant differences in both financial and real option values.
Stochastic Volatility and Seasonality in Commodity Futures and Options: The Case of Soybeans
, 2002
"... ..."
An Nfactor Gaussian Model of Oil Futures Prices
 Journal of Futures Markets
, 2006
"... This article studies the ability of an Nfactor Gaussian model to explain the stochastic behavior of oil futures prices when estimated with the use of all available price information, as opposed to traditional approaches of aggregating data for a set of maturities. A Kalman filter estimation proced ..."
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Cited by 13 (1 self)
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This article studies the ability of an Nfactor Gaussian model to explain the stochastic behavior of oil futures prices when estimated with the use of all available price information, as opposed to traditional approaches of aggregating data for a set of maturities. A Kalman filter estimation procedure that allows for a timedependent number of daily observations is used to calibrate the model. When applied to all daily oil futures price transactions from 1992 to 2001, the model performs very well, requiring at least three factors to explain the term structure of futures prices, but four factors to fit the volatility term structure. The model also performs very well for daily
Commodity Currencies: Why Are Exchange Rate Futures Biased if Commodity Futures Are Not?, The Economic Record
, 2007
"... Abstract This paper adds to the puzzle of the forward bias of exchange rates by noting that while the exchange rate of a small commodityexporting economy can be closely tied to commodity prices, a portfolio of commodity futures exhibits little if any bias. Using data for Australia, the bias of exc ..."
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Cited by 13 (0 self)
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Abstract This paper adds to the puzzle of the forward bias of exchange rates by noting that while the exchange rate of a small commodityexporting economy can be closely tied to commodity prices, a portfolio of commodity futures exhibits little if any bias. Using data for Australia, the bias of exchange rate forwards is shown by the negative slope coefficient from a 'Fama regression'. This paper finds that the slope coefficient from an equivalent regression using a portfolio of commodity futures designed to replicate export prices, and so the exchange rate, is positive. A model of a small open economy is developed from micro foundations in which the exchange rate depends on export prices, as well as import prices, nontraded output and the domestic money supply. This exchange rate model is used to examine whether the domestic monetary supply could cause the bias in exchange rate forwards when there is an absence of bias in commodity futures. Three potential explanations are considered. Systematic expectation errors about the monetary process, while requiring strong assumptions, receive empirical support from the behaviour of the exchange rate. Neither monetary policy nor peso problems seem capable of explaining the puzzle.
Financialization, Crisis and Commodity Correlation Dynamics
 Journal of International Financial Markets, Institutions, and Money
, 2013
"... We study bivariate conditional volatility and correlation dynamics for individual commodity futures and
nancial assets from May1990July 2009 using DSTCC GARCH (Silvennoinen and Teräsvirta 2009). These models allow correlation to vary smoothly between extreme states via transition functions driv ..."
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Cited by 12 (0 self)
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We study bivariate conditional volatility and correlation dynamics for individual commodity futures and
nancial assets from May1990July 2009 using DSTCC GARCH (Silvennoinen and Teräsvirta 2009). These models allow correlation to vary smoothly between extreme states via transition functions driven by indicators of market conditions. Expected stock volatility and money manager open interest in futures markets are relevant transition variables. Results point to increasing integration between commodities and
nancial markets. Higher commodity returns volatility is predicted by lower interest rates and corporate bond spreads, US dollar depreciations, higher expected stock volatility and
nancial traders open positions. We observe higher and more variable correlation, particularly from midsample, often predicted by higher expected stock volatility. For many pairings, we observe a structural break in the conditional correlation processes from the late 1990s.
The Impact of Index and Swap Funds on Commodity Futures Markets PRELIMINARY RESULTS
"... The report was prepared for the OECD by Professors Scott Irwin and Dwight Sanders. It represents a preliminary study which aims to clarify the role of index and swap funds in agricultural and energy commodity futures markets. The full report including the econometric analysis is available in the Ann ..."
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Cited by 12 (1 self)
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The report was prepared for the OECD by Professors Scott Irwin and Dwight Sanders. It represents a preliminary study which aims to clarify the role of index and swap funds in agricultural and energy commodity futures markets. The full report including the econometric analysis is available in the Annex to this report. While the increased participation of index fund investments in commodity markets represents a significant structural change, this has not generated increased price volatility, implied or realised, in agricultural futures markets. Based on new data and empirical analysis, the study finds that index funds did not cause a bubble in commodity futures prices. There is no statistically significant relationship indicating that changes in index and swap fund positions have increased market volatility. The evidence presented here is strongest for the agricultural futures markets because the data on index trader positions are measured with reasonable accuracy. The evidence is not as strong in the two energy markets studied here because of considerable uncertainty about the degree to which the available data actually reflect index trader positions in these markets. An unexpected finding was a negative relationship between index and swap fund positions and market volatility. That is, there is some evidence that increases in index trader positions are followed by lower
Computational Methods for Oblivious Equilibrium
, 2008
"... Oblivious equilibrium is a new solution concept for approximating Markov perfect equilibrium in dynamic models of imperfect competition among heterogeneous firms. In this paper, we present algorithms for computing oblivious equilibrium and for bounding approximation error. We report results from com ..."
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Cited by 9 (1 self)
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Oblivious equilibrium is a new solution concept for approximating Markov perfect equilibrium in dynamic models of imperfect competition among heterogeneous firms. In this paper, we present algorithms for computing oblivious equilibrium and for bounding approximation error. We report results from computational case studies that serve to assess both efficiency of the algorithms and accuracy of oblivious equilibrium as an approximation to Markov perfect equilibrium. We also extend the definition of oblivious equilibrium, originally proposed for models with only firmspecific idiosyncratic random shocks, and our algorithms to accommodate models with industrywide aggregate shocks. Our results suggest that, by using oblivious equilibrium to approximate Markov perfect equilibrium, it is possible to greatly increase the set of dynamic models of imperfect competition that can be analyzed computationally.