Real Options in the Energy Markets
نویسنده
چکیده
Electricity prices are notoriously hard to model due to their exotic behav-iors. The extraordinarily high volatilities, strong mean reversion, pronouncedcyclical price patterns, and occasional occurrence of price spikes may demandvery complicated models.From the empirical analysis with the Dutch and German electricity mar-ket data, we nd that the two-state regime switching models have a superiorperformance than a jump di¤usion model in terms of replicating the highermoments in the historical data and forecasting electricity prices.The real options method has been used in the valuation of energy assetsand the decision-makings in operation and investment in power plants. Ourempirical simulation results show that power plant values can be decreasedby volumetric risk factors from both the supply side and the demand side.Investment opportunities in power plants can be valued as American op-tions. We value di¤erent types of investment options by using both the Hulland White trinomial tree and the Least Squares Monte Carlo method. Wecon rm the conclusion that the option value to invest in a peak-load powerplant is higher than the option to invest in a base-load power plant when thespark spread is lower, and verse visa.
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