A Jump Diffusion Model for Evaluating of an Oilfield Development Project and its Application

Abstract:

Irreversible investments with largest outlay made with incomplete information are the mainstay of the oilfield development. Real Options Analysis (ROA) is a useful tool for making investment decisions under market uncertainty. Normal information generates continuous mean-reverting process for oil prices, whereas random abnormal information generates discrete jumps of random size. We will evaluate an oilfield development project using Mean-Reversion with Jumps (MRJ). As an example, we compare MRJ and Geometric Brownian Motion (GBM )valuation for the timing of investment and the optimization problem. This article concludes MRJ in some cases can induce better corporate decisions than GBM.

• Periodical: Advanced Materials Research (Volumes 616-618)
• Pages: 1563-1567
• DOI: https://doi.org/10.4028/www.scientific.net/AMR.616-618.1563
• Online since: December 2012
• Authors: Yuan Qi Zhou, Liang Yan
• Keywords: Geometric Brownian Motion, Mean Reversion and Jumps, Oilfield Development Investment, Real Option

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