Investment spikes and uncertainty in the petroleum refining industry

Timothy Dunne, Xiaoyi Mu

    Research output: Contribution to journalArticle

    20 Citations (Scopus)

    Abstract

    This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the U.S. We construct uncertainty measures from the commodity futures market and use data on actual capacity changes to measure investment episodes. Since capacity changes in U.S. refineries occur infrequently, we empirically model the investment process using hazard models. An increase in uncertainty decreases the probability that a refinery might adjust its capacity. The results are robust to various investment thresholds. Our findings lend support to theories that emphasize the role of irreversibility in investment decisions.

    Original languageEnglish
    Pages (from-to)190-213
    Number of pages24
    JournalJournal of Industrial Economics
    Volume58
    Issue number1
    DOIs
    Publication statusPublished - Mar 2010

    Keywords

    • CAPITAL ADJUSTMENT
    • EMPIRICAL-EVIDENCE
    • FUTURES PRICES
    • DURATION DATA
    • DEPENDENCE
    • EFFICIENCY
    • MODELS
    • IMPACT
    • LUMPS
    • COST

    Cite this

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    title = "Investment spikes and uncertainty in the petroleum refining industry",
    abstract = "This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the U.S. We construct uncertainty measures from the commodity futures market and use data on actual capacity changes to measure investment episodes. Since capacity changes in U.S. refineries occur infrequently, we empirically model the investment process using hazard models. An increase in uncertainty decreases the probability that a refinery might adjust its capacity. The results are robust to various investment thresholds. Our findings lend support to theories that emphasize the role of irreversibility in investment decisions.",
    keywords = "CAPITAL ADJUSTMENT, EMPIRICAL-EVIDENCE, FUTURES PRICES, DURATION DATA, DEPENDENCE, EFFICIENCY, MODELS, IMPACT, LUMPS, COST",
    author = "Timothy Dunne and Xiaoyi Mu",
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    language = "English",
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    Investment spikes and uncertainty in the petroleum refining industry. / Dunne, Timothy; Mu, Xiaoyi.

    In: Journal of Industrial Economics, Vol. 58, No. 1, 03.2010, p. 190-213.

    Research output: Contribution to journalArticle

    TY - JOUR

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    AU - Mu, Xiaoyi

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    N2 - This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the U.S. We construct uncertainty measures from the commodity futures market and use data on actual capacity changes to measure investment episodes. Since capacity changes in U.S. refineries occur infrequently, we empirically model the investment process using hazard models. An increase in uncertainty decreases the probability that a refinery might adjust its capacity. The results are robust to various investment thresholds. Our findings lend support to theories that emphasize the role of irreversibility in investment decisions.

    AB - This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the U.S. We construct uncertainty measures from the commodity futures market and use data on actual capacity changes to measure investment episodes. Since capacity changes in U.S. refineries occur infrequently, we empirically model the investment process using hazard models. An increase in uncertainty decreases the probability that a refinery might adjust its capacity. The results are robust to various investment thresholds. Our findings lend support to theories that emphasize the role of irreversibility in investment decisions.

    KW - CAPITAL ADJUSTMENT

    KW - EMPIRICAL-EVIDENCE

    KW - FUTURES PRICES

    KW - DURATION DATA

    KW - DEPENDENCE

    KW - EFFICIENCY

    KW - MODELS

    KW - IMPACT

    KW - LUMPS

    KW - COST

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