Modelling the impact of oil price volatility on investment decision-making

Hammad, Rayan Salem

Abstract

The energy industry is transforming from the old, vertically integrated model into a more competitive model in which most companies are exposed to different types of risk. One of the major challenges facing energy companies is making investment decision-making associated with the prices of crude oils. Since 1973, crude oil price behaviour has become more volatile, which suggested that different forces were driving crude oil prices. One of the main factors in generating the behaviour of crude oil prices is the role performed by OPEC and non-OPEC crude oil producers. Several theoretical and empirical analyses suggested that the economics behind OPEC’s supply of crude oil is different than those of non-OPEC supply. This study investigates whether prices of OPEC crude oils and prices of non-OPEC crude oils share a common data-generating process. The study empirically tests oil price volatility of OPEC and non-OPEC crude oil prices using GARCH models. It also applies the Johansen Cointegration Model and the Engle-Granger Error Correlation Model (ECM) model to test the long – and short-term relationship between crude prices (OPEC and non-OPEC) and stock prices of different oil companies. Finally, a panel data approach using fixed and random effects is used to estimate the reaction of OPEC and non-OPEC crude oil prices to events and news items that could possibly affect oil supply and prices. The results obtained suggest that the behaviour of crude oil prices is not affected by OPEC or non-OPEC affiliation. This finding suggests that the international oil market is globally integrated market that is able to factor in any possible changes to supply behaviour of OPEC or non-OPEC producers

Citation

Hammad, R. S. (2011). Modelling the impact of oil price volatility on investment decision-making. (Thesis). University of Hull. Retrieved from https://hull-repository.worktribe.com/output/4212025

• Thesis Type: Thesis
• Deposit Date: Mar 16, 2012
• Publicly Available Date: Feb 22, 2023
• Keywords: Business
• Public URL: https://hull-repository.worktribe.com/output/4212025
• Additional Information: Business School, The University of Hull
• Award Date: Dec 1, 2011