Trading Portfolio Strategy Optimization via Mean-Variance Model Considering Multiple Energy Derivatives

Energy retailers that sell energy at fixed prices are at risk of bankruptcy due to instantaneous fluctuations in wholesale electricity prices. Energy derivatives, e.g., electricity options, can be purchased by energy retailers then sold to customers as one potential risk-mitigation tool. A class of...

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Bibliographic Details
Published in:Processes 2023-02, Vol.11 (2), p.532
Main Authors: Xu, Shaoshan, Shen, Jun, Hua, Haochen, Li, Fangshu, Yu, Kun, Li, Zhenxing, Gao, Xinqiang, Dong, Xueqiang
Format: Article
Language:English
Subjects:
Bankruptcy
Carbon
Clean technology
Commodities industry
Differential equations
Electricity
Electricity pricing
Emissions
Energy
Energy industry
Investment analysis
Mathematical models
Maximum likelihood estimation
Numerical analysis
Optimal control
Optimization
Ordinary differential equations
Portfolio management
Power supply
Pricing
Renewable resources
Retail stores
Risk
Stochasticity
Strategy
Supply & demand
Trends
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Summary:Energy retailers that sell energy at fixed prices are at risk of bankruptcy due to instantaneous fluctuations in wholesale electricity prices. Energy derivatives, e.g., electricity options, can be purchased by energy retailers then sold to customers as one potential risk-mitigation tool. A class of energy retailers that trade energy derivatives, including the electricity option, the carbon option and the green certificate, is considered in this paper. In terms of energy retailers, a strategy that can maximize the value of the purchased energy derivatives over a period of time and minimize the risk due to the stochastic price fluctuations is developed. Firstly, the dynamic prices of the electricity option as well as the carbon option are described by stochastic differential equations, and the dynamic prices of the green certificate are described by ordinary differential equations. Historical price data are used to obtain the parameters of both stochastic and ordinary differential equations by maximum likelihood estimation. Next, an investment portfolio is established as a mean-variance portfolio selection problem where the retailer maintains the satisfactory asset value and minimizes the risk simultaneously. Then, the problem is transformed into a stochastic optimal control problem which can be solved analytically by using the linear-quadratic method. Finally, the numerical simulations illustrate the feasibility of the proposed method.
ISSN:2227-9717
2227-9717
DOI:10.3390/pr11020532