NATURAL GAS-FIRED POWER PLANTS VALUATION AND OPTIMIZATION UNDER LÉVY COPULAS AND REGIME SWITCHING

Nemat Safarov () and Colin Atkinson
Additional contact information
Nemat Safarov: Mathematics Department, Imperial College London, London SW7 2AZ, UK
Colin Atkinson: Mathematics Department, Imperial College London, London SW7 2AZ, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 01, 1-38

Abstract: In this work, we analyze a stochastic control problem for the valuation of a natural gas power station while taking into account operating characteristics. Both electricity and gas spot price processes exhibit mean-reverting spikes and Markov regime-switches. The Lévy regime-switching model incorporates the effects of demand-supply fluctuations in energy markets and abrupt economic disruptions or business cycles. We make use of skewed Lévy copulas to model the dependence risk of electricity and gas jumps. The corresponding coupled Hamilton–Jacobi–Bellman (HJB) equations are solved by an explicit finite difference method. The numerical approach gives us both the value of the plant and its optimal operating strategy depending on the gas and electricity prices, current temperature of the boiler and time. The surfaces of control strategies and contract values are obtained by implementing the numerical method for a particular example.

Keywords: Power plant; stochastic control; coupled HJB equations; Lévy copulas; regime switching (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024917500042
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:20:y:2017:i:01:n:s0219024917500042

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024917500042

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().