An Optimal Rule for Switching over to Renewable fuels with Lower Price Volatility: A Case of Jump Diffusion Process

Kavita Sardana and Subhra K. Bhattacharya

No 103926, 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania from Agricultural and Applied Economics Association

Abstract: This study investigates the optimal switching boundary to a renewable fuel when oil prices exhibit continuous random fluctuations along with occasional discontinuous jumps. In this paper, oil prices are modeled to follow jump diffusion processes. A completeness result is derived. Given that the market is complete the value of a contingent claim is risk neutral expectation of the discounted pay off process. Using the contingent claim analysis of investment under uncertainty, the Hamilton-Jacobi-Bellman (HJB) equation is derived for finding value function and optimal switching boundary. We get a mixed differential-difference equation which would be solved using numerical methods.

Keywords: Demand and Price Analysis; Resource/Energy Economics and Policy (search for similar items in EconPapers)
Pages: 18
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea11:103926

DOI: 10.22004/ag.econ.103926

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