Gas storage valuation : price modelling v. optimization methods
Working paper
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http://hdl.handle.net/11250/163949Utgivelsesdato
2008-10Metadata
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Sammendrag
The existence of a financial gas market motivates the analysis of gas storage as a separate
asset, using the market value context for utilization and valuation. In the recent literature, gas
storage is typically analysed within a framework with a simple one-factor price dynamics that
is solved to optimality. We follow a different approach, where the market is represented by a
forward curve with daily granularity, the price uncertainty is represented by six factors, and
where we impose a simple and intuitive storage strategy that follows from repeated
maximization of the intrinsic value.
Based on UK natural gas market price data, we obtain the gas storage value using our
approach, and compare with results from one-factor models as well as with perfect foresight.
We find that our approach captures much more of the true flexibility value than the one-factor
models. Our results indicate that the appropriate framework for analyzing complex assets like
gas storage is a rich representation of the price dynamics combined with a simple and intuitive
decision rule.
Beskrivelse
This version: September 26, 2008
Utgiver
Norwegian School of Economics and Business Administration. Department of Finance and Management ScienceSerie
Discussion paper2008:20