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Portfolio optimization using Mixture Design of Experiments: Scheduling trades within electricity markets

  • de Oliveira, Francisco Alexandre
  • de Paiva, Anderson Paulo
  • Lima, José Wanderley Marangon
  • Balestrassi, Pedro Paulo
  • Mendes, Ronã Rinston Amaury
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    Deregulation of the electricity sector has given rise to several approaches to defining optimal portfolios of energy contracts. Financial tools - requiring substantial adjustments - are usually used to determine risk and return. This article presents a novel approach to adjusting the conditional value at risk (CVaR) metric to the mix of contracts on the energy markets; the approach uses Mixture Design of Experiments (MDE). In this kind of experimental strategy, the design factors are treated as proportions in a mixture system considered quite adequate for treating portfolios in general. Instead of using traditional linear programming, the concept of desirability function is here used to combine the multi-response, nonlinear objective functions for mean with the variance of a specific portfolio obtained through MDE. The maximization of the desirability function is implied in the portfolio optimization, generating an efficient recruitment frontier. This approach offers three main contributions: it includes risk aversion in the optimization routine, it assesses interaction between contracts, and it lessens the computational effort required to solve the constrained nonlinear optimization problem. A case study based on the Brazilian energy market is used to illustrate the proposal. The numerical results verify the proposal's adequacy.

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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 33 (2011)
    Issue (Month): 1 (January)
    Pages: 24-32

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    Handle: RePEc:eee:eneeco:v:33:y:2011:i:1:p:24-32
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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
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    7. Galvani, Valentina & Plourde, Andre, 2009. "Portfolio Diversification in Energy Markets," Working Papers 2009-6, University of Alberta, Department of Economics.
    8. Carpio, Lucio Guido Tapia & Pereira, Amaro Jr., 2007. "Economical efficiency of coordinating the generation by subsystems with the capacity of transmission in the Brazilian market of electricity," Energy Economics, Elsevier, vol. 29(3), pages 454-466, May.
    9. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
    10. Sadeghi, Mehdi & Shavvalpour, Saeed, 2006. "Energy risk management and value at risk modeling," Energy Policy, Elsevier, vol. 34(18), pages 3367-3373, December.
    11. Marimoutou, Velayoudoum & Raggad, Bechir & Trabelsi, Abdelwahed, 2009. "Extreme Value Theory and Value at Risk: Application to oil market," Energy Economics, Elsevier, vol. 31(4), pages 519-530, July.
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