Evaluating Natural Resource Investments Under Different Model Dynamics: Managerial Insights

35 Pages Posted: 23 Aug 2012

See all articles by Andrianos E. Tsekrekos

Andrianos E. Tsekrekos

Athens University of Economics and Business - Department of Accounting and Finance

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Rafał Wojakowski

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: September 2012

Abstract

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.

Keywords: natural resource investment, real options, factor models, commodity prices, least‐squares Monte Carlo simulation

JEL Classification: C15, D81, G13, G31, Q30

Suggested Citation

Tsekrekos, Andrianos E. and Shackleton, Mark B. and Wojakowski, Rafał, Evaluating Natural Resource Investments Under Different Model Dynamics: Managerial Insights (September 2012). European Financial Management, Vol. 18, Issue 4, pp. 543-575, 2012, Available at SSRN: https://ssrn.com/abstract=2134709 or http://dx.doi.org/10.1111/j.1468-036X.2010.00544.x

Andrianos E. Tsekrekos (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

Rafał Wojakowski

affiliation not provided to SSRN

No Address Available

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