Comparing Two Models for Evaluating an Oilfield Development Project: Mean-Reversion with Jumps, Geometric Brownian Motion

Abstract:

With incomplete information, the oilfield development is a high-risk venture and requires the largest outlay which is not Irreversible. Real Options Analysis (ROA) is a useful tool for making investment decisions under market uncertainty. We evaluate an oilfield development project using Mean-Reversion with Jumps (MRJ) and Geometric Brownian Motion (GBM). As an example, we compare GBM and MRJ valuation for the timing of investment and the optimization problem. Furthermore, we investigate the impact of different parameters of the two stochastic oil price models. This article concludes MRJ has a better risk management ability than GBM has, especially in a higher market oil price of risk.

• Periodical: Advanced Materials Research (Volumes 616-618)
• Pages: 1568-1572
• DOI: https://doi.org/10.4028/www.scientific.net/AMR.616-618.1568
• 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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