1 / 8

Energy Prices Confront CAPM: Implications for Discount Rates

Energy Prices Confront CAPM: Implications for Discount Rates. Xiaomei (Barbara) Chen NCSU. What discount rate should be used for evaluating energy investments?. Discount Rate. Rate of time preference Economic growth Risk premium. Three Points.

tracy
Download Presentation

Energy Prices Confront CAPM: Implications for Discount Rates

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Energy Prices Confront CAPM: Implications for Discount Rates Xiaomei (Barbara) Chen NCSU

  2. What discount rate should be used for evaluating energy investments?

  3. Discount Rate • Rate of time preference • Economic growth • Risk premium

  4. Three Points • CAPM (Capital Asset Pricing Model) helps explain commodity prices • Especially energy prices • Risk premiums vary weekly • An unusually powerful test of CAPM • It matters for discounting energy investment

  5. Some Notations • Energy futures return: • Risk-free asset return • Risk Premium: • Commodity beta: • CAPM Predicted Risk Premium:

  6. Energy Futures Propane Crude Oil Gasoline Heating Oil Natural Gas Coal Fitted Model: y = 0.17 + 1.69 x (0.09) (0.40)

  7. Crude Oil Futures Fitted Model: y = 0.17 + 1.12 x (0.12) (0.31)

  8. CAPM Predicted Risk Premium Crude Oil Futures 1985 1990 1995 2000 2005 2010

More Related