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Gas storage valuation applying numerically constructed recombining trees

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  • Felix, Bastian Joachim
  • Weber, Christoph

Abstract

The liberalization of European natural gas markets forces market participants to base their decisions on market prices. For owners and operators of natural gas storage facilities it is therefore necessary to take market prices into account for their decisions. In this framework this paper provides a new approach for the valuation of natural gas storage facilities. Using stochastic dynamic programming on multinomial recombining trees, the optimal storage strategy and value are determined. For this we (i) estimate the deterministic and random impacts on natural gas prices, (ii) simulate gas prices considering the results of the first step, (iii) construct numerically the recombining tree using the simulation results, (iv) determine the optimal storage strategy and value. Besides the determination of the optimal storage value and operation schedule the value quantiles are calculated. Via the quantiles relevant risk measures like value at risk and conditional value at risk are determined.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 216 (2012)
Issue (Month): 1 ()
Pages: 178-187

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Handle: RePEc:eee:ejores:v:216:y:2012:i:1:p:178-187

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Web page: http://www.elsevier.com/locate/eor

Related research

Keywords: OR in energy; Dynamic programming; Stochastic programming; Real option valuation; Recombining trees;

References

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  1. Patrick Jaillet & Ehud I. Ronn & Stathis Tompaidis, 2004. "Valuation of Commodity-Based Swing Options," Management Science, INFORMS, vol. 50(7), pages 909-921, July.
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  5. Nicola Secomandi, 2010. "Optimal Commodity Trading with a Capacitated Storage Asset," Management Science, INFORMS, vol. 56(3), pages 449-467, March.
  6. Bjerksund, Petter & Stensland, Gunnar & Vagstad, Frank, 2008. "Gas Storage Valuation: Price Modelling v. Optimization Methods," Discussion Papers 2008/20, Department of Business and Management Science, Norwegian School of Economics.
  7. Hahn, Warren J. & Dyer, James S., 2008. "Discrete time modeling of mean-reverting stochastic processes for real option valuation," European Journal of Operational Research, Elsevier, vol. 184(2), pages 534-548, January.
  8. Schlüter, Stephan & Davison, Matt, 2010. "Pricing an European gas storage facility using a continuous-time spot price model with GARCH diffusion," IWQW Discussion Paper Series 02/2010, Friedrich-Alexander-Universität Erlangen-Nürnberg, Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW).
  9. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
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Cited by:
  1. Bastian Felix, 2012. "Gas Storage Valuation: A Comparative Simulation Study," EWL Working Papers 1201, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Apr 2014.

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