Equilibrium Exhaustible Resource Price Dynamics

61 Pages Posted: 22 Apr 2006 Last revised: 29 Jun 2009

See all articles by Murray Carlson

Murray Carlson

University of British Columbia (UBC) - Sauder School of Business

Zeigham Khokher

Tulane University

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: February 2006

Abstract

We develop equilibrium models of an exhaustible resource market where both prices and extraction choices are determined endogenously. Our analysis highlights a role for adjustment costs in generating price dynamics that are consistent with observed oil and gas forward prices as well as with the two-factor prices processes that were calibrated in Schwartz and Smith (2000). Stochastic volatility aries in our two-factor model as a natural consequence of production for oil and natural gas prices. Differences between the endogenous price processes considered in earlier papers can generate significant differences in both financial and real option values.

Suggested Citation

Carlson, Murray D. and Khokher, Zeigham and Titman, Sheridan, Equilibrium Exhaustible Resource Price Dynamics (February 2006). NBER Working Paper No. w12000. Available at SSRN: https://ssrn.com/abstract=881234

Murray D. Carlson

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8358 (Phone)

Zeigham Khokher

Tulane University ( email )

7 McAlister Drive
Tulane University
NEW ORLEANS, LA 70118
United States
504-865-5067 (Phone)

Sheridan Titman (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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