An Integrated CVaR and Real Options Approach to Investments in the Energy Sector

Ines Fortin, Sabine Fuss, Jaroslava Hlouskova, Nikolay Khabarov, Michael Obersteiner and Jana Szolgayova
Additional contact information
Ines Fortin: Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria
Sabine Fuss: University of Maastricht/UNU-Merit, Maastricht, The Netherlands
Jaroslava Hlouskova: Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria
Nikolay Khabarov: International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria
Michael Obersteiner: International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria
Jana Szolgayova: International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria

No 209, Economics Series from Institute for Advanced Studies

Abstract: The objective of this paper is to combine a real options framework with portfolio optimization techniques and to apply this new framework to investments in the electricity sector. In particular, a real options model is used to assess the adoption decision of particular technologies under uncertainty. These technologies are coal-fired power plants, biomassfired power plants and onshore wind mills, and they are representative of technologies based on fossil fuels, biomass and renewables, respectively. The return distributions resulting from this analysis are then used as an input to a portfolio optimization, where the measure of risk is the Conditional Value-at-Risk (CVaR).

Keywords: Portfolio optimization; CVaR; climate change policy; uncertainty; real options; electricity; investments (search for similar items in EconPapers)
JEL-codes: C61 D81 D92 G11 Q4 Q56 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ene, nep-env and nep-rmg
Date: 2007-05

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Persistent link: http://EconPapers.repec.org/RePEc:ihs:ihsesp:209

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