 Parametric model risk and power plant valuationKarl Bannör, Rüdiger Kiesel, Anna Nazarova and Matthias Scherer Energy Economics, 2016, vol. 59, issue C, 423-434 Abstract: The fact that model and parameter risk are important sources of uncertainty in option pricing models and for risk management procedures has recently been recognised for financial markets, see Cont (2006); Morini (2011); Bannör and Scherer (2013). In the context of energy markets, investment decisions are often based on the valuation of fossil power plants as real options — depending on various underlying processes such as the power-, carbon emission certificate-, and gas price. To capture parametric model risk inherent in the valuation procedure of fossil power plants, we use a methodology recently established in Bannör and Scherer (2013). As gas-fired power plants are seen as flexible and low-carbon sources of electricity, which are important building blocks in terms of the switch to a low-carbon energy generation, we consider the model risk in this asset class in detail. Our findings reveal that spike risk is by far the most important source of parametric model risk. Keywords: Power plant valuation; Parametric model risk; Spikes; Energy markets; Spark spread option (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:59:y:2016:i:c:p:423-434 DOI: 10.1016/j.eneco.2016.08.004 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.