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Portfolio Management and Stochastic Optimization in Discrete Time: An Application to Intraday Electricity Trading and Water Values for Hydroassets

See on Scoop.itBounded Rationality and Beyond
 

Simone Farinelli and Luisa Tibiletti

Abstract: Hydro storage system optimization is becoming one of the most challenging task in Energy Finance. Following the Blomvall and Lindberg (2002) interior point model, we set up a stochastic multiperiod optimization procedure by means of a “bushy” recombining tree that provides fast computational results. Inequality constraints are packed into the objective function by the logarithmic barrier approach and the utility function is approximated by its second order Taylor polynomial. The optimal solution for the original problem is obtained as a diagonal sequence where the first diagonal dimension is the parameter controlling the logarithmic penalty and the second is the parameter for the Newton step in the construction of the approximated solution. Optimimal intraday electricity trading and water values for hydroassets are computed. The algorithm is implemented in Mathematica.

See on arxiv.org



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