Market Price Setting Research Articles

Modified convex hull pricing for fixed load power markets

We consider a fixed load power market with non-convexities originating from the start-up and no-load costs of generators. The convex hull (minimum-uplift) pricing method results in power prices that minimize the total uplift payment to generators introduced to compensate their potential profits lost by accepting the centralized dispatch solution. In this method, an opportunity to supply any other output volume allowed by a private constraint set of a producer is treated as foregone, and all these output volumes enter the lost profit calculation. We propose identifying the output volumes that are attainable at the power market (i.e., the volumes that are both economically and technologically feasible) and constructing the corresponding modified private feasible set for each producer, which is a subset of the producer’s original private feasible set. These sets are further utilized in the lost profit calculations for the producers. The new pricing method results in a generally different set of market prices and lower (or equal) total uplift payment compared to the convex hull pricing algorithm.

Associated petroleum gas market: Pricing mechanisms

In Western Siberia, the main oil-producing region of Russia, all functioning regulated marketsof associated petroleum gas (APG) have been liberalized. Because of the monopoly-monopsony structure there is a threat of market prices deviation from socially optimal levels, corresponding to the maximum of public good. The analysis of this threat and assessment of the factors that support it is an urgent problem, which has not yet been covered in the scientific literature. The purpose of the study is to assess the consequences of the liberalization of APG markets. The tool for solving the problems of the study is the economic theory of formation of market equilibrium prices in the joint production of APG and oil. On a liberalized APG market, the maximum public welfare corresponds to a set of market prices, which are determined when considering a virtual competitive market. The actual price is formed under the influence of non-market factors. The liberalized market has no mechanism for forming a socially optimalcomposition of non-market factors, and the parties have no information allowing them to determine the corresponding socially optimal APG price. Therefore, it must be set by the regulator. The algorithms for calculation of marginal costs of joint production of oil and APG and socially optimal price of APG are constructed.

Structural Alternatives in Procurement of Gazprom Infrastructure Projects

The paper analyzes structural alternatives in the implementation of infrastructure projects on the example of main gas pipelines. Particular attention is paid to the impact of various forms of procurement procedures on the course and result of the implementation of the infrastructure project as a whole. It is shown that the choice of procurement method can influence the structure of incentives and risks of the parties involved, as well as indirectly impact on the establishment of the market price setting, the level of product quality in the industry, and the complex cost of project implementation. Noting the extreme importance of the issues of ensuring the quality of the products used, the authors review the available structural alternatives for organizing quality control, show the possible mechanisms of the influence of the downtime of enterprises on reducing the level of industry competencies.

Reduction of error in determining the cost of construction resources in estimated documentation

In Ukraine, the construction costs in the investor's estimates is calculated by the resource method - using resource element estimation norms. Therefore, the accuracy in determining the components of these norms can cause the error in calculating the construction costs of the object. In this article, the example of construction materials shows the influence of the resource name in the resource element estimation norm on the accuracy of determining the market price of this resource in the estimating documentation, and thus on the accuracy of the construction costs calculation at the stage of the investor‘s costs planning. The main attention is paid to search for the ways to reduce the quantity of the samples, as the main factor influencing the critical indicators - the time and cost of work to determine the market price of the construction materials. The unification of the construction resources names in the resource element estimation norms and a problem of comparison of these names with the real building materials is highlighted in the article too. The examples show which elements in the name of construction materials in the element resource norm contribute to the reduction of the samples quantity and affect the price variation for the samples and the general set of market prices of the relevant materials. This article offers the term "name of the resource for estimation" which generalizes and characterizes the names of materials in DSTU (national standard of Ukraine) and SOU (standards of organization of Ukraine) resource element estimation norms. The rules of formation, use and specification of the "name of the resource for estimation" during the development of resource element norms and at all stages of design and construction of the object are offered too. The author proposes the amendments to the current procedure for the development and revision of resource element estimation norms, which will help to reduce the errors in determining the market price of construction resources during the creation of estimation documentation.

Generation adequacy of electric power systems in market price setting

We propose the new model of generation adequacy optimization. Optimization criterion is a maximum of social welfare. Social welfare consists of profits of generating companies, consumer surplus, costs for development and servicing of electrical grids. In the article we present a review of existed methods of adequacy level management in liberalized electric power systems. Optimization of adequacy level is based on analysis of variants of development of the electric power system. For adequacy analysis of the variants of development we multiple estimate the electricity shortage in random hours of the system work. Analysis of the system work in every random hour is realized in two stages. At first we define values of equilibrium electricity demand in every system node and equilibrium price of electricity according to Cournot model. We consider only electricity market in the model. At the next stage we simulate failures of power generating equipment and transmission lines. The electricity shortage in a current hour is estimated on the second stage. After a whole cycle of analysis, we compute reliability indexes and profits of generating companies. Profits of generating companies are depended on the reliability of the electricity supply. The simulations of random values are based on Monte Carlo method.

Modified convex hull pricing for power markets with price-sensitive load

We consider a general power market with price-sensitive consumer bids and non-convexities originating from supply (start-up and no-load costs, nonzero minimum output limits of generating units, etc.) and demand. The convex hull (minimum-uplift) pricing method produces the set of power prices that minimizes the total uplift payments to the market players needed to compensate their potential profits lost by accepting the centralized dispatch solution. All opportunities to supply (consume) any other output (consumption) volumes allowed by market player individual operational constraints are considered as foregone in the convex hull pricing method. We modify the convex hull pricing algorithm by defining for each market player a modified individual feasible set that is utilized in the lost profit calculation. These sets are based on the output (consumption) volumes that are economically and technologically feasible in the centralized dispatch. The new pricing method results in the generally different set of market prices and lower (or equal) total uplift payment compared to the convex hull pricing algorithm.

The Second Partial Derivative of Option Price with Respect to the Strike: A Historical Reminiscence

An option’s market price reflects the risk-neutral probability that it will end up in the money. Research has been increasing in recent years that shows how, given a set of market prices for options covering a range of strikes, an estimate of the entire risk-neutral probability distribution can be obtained. The technique is based on the fact that the second partial derivative of the option pricing function with respect to the strike price is the risk-neutral density (discounted from option expiration). This idea is generally attributed to Breeden and Litzenberger’s 1978 paper. In this article, Zimmermann shows that the connection between the second partial derivative of the option price with respect to the exercise price and risk-neutral probabilities has a much longer history, including a little-known 1974 note by Fischer Black, and going all the way back to Bachelier in 1900.

A Formal Approach to the Problem of Logical Non-Omniscience

We present the logical induction criterion for computable algorithms that assign probabilities to every logical statement in a given formal language, and refine those probabilities over time. The criterion is motivated by a series of stock trading analogies. Roughly speaking, each logical sentence phi is associated with a stock that is worth $1 per share if phi is true and nothing otherwise, and we interpret the belief-state of a logically uncertain reasoner as a set of market prices, where pt_N(phi)=50% means that on day N, shares of phi may be bought or sold from the reasoner for 50%. A market is then called a logical inductor if (very roughly) there is no polynomial-time computable trading strategy with finite risk tolerance that earns unbounded profits in that market over time. We then describe how this single criterion implies a number of desirable properties of bounded reasoners; for example, logical inductors outpace their underlying deductive process, perform universal empirical induction given enough time to think, and place strong trust in their own reasoning process.

Price Setting in Markets for Egyptian Farmed Fish

This article investigates the relation between fish supply volumes and sales values in El-Obour wholesale market. The study also examines market cointegration between farmed tilapia and imported wild frozen fish (tilapia, mackerel, Mediterranean horse mackerel, sardine and lizardfish). Regression and Johansen cointegration analysis was used for market data analysis. Market data includes fish sales volume and prices in El-Obour wholesale market in 2012. The results indicate that there is a negative relationship between the volume of farmed tilapia supplied to the market and sales values. Cointegration analysis shows that tilapia grade 1 and 2 prices compete together in market while catfish does not compete with farmed tilapia. Frozen lizardfish and sardines prices are cointegrated with tilapia grades 1 and 2 while tilapia grade 3 competes with lizardfish and Mediterranean horse mackerel, but there was no evidence of market cointegration between catfish and frozen wild fish. The implications are important as increased tilapia supplies to the market leads to declining sales prices. In addition, there is market competition between wild frozen fish and farmed tilapia, however they are not fully integrated. Increasing imports of frozen fish could reduce the selling price of farmed tilapia and negatively influence investment in fish farms.

The Optimality of Using Marginal Land for Bioenergy Crops: Tradeoffs between Food, Fuel, and Environmental Services

We assess empirically how agricultural lands should be used to produce the highest valued outputs, which include food, energy, and environmental goods and services. We explore efficiency tradeoffs associated with allocating land between food and bioenergy and use a set of market prices and nonmarket environmental values to value the outputs produced by those crops. We also examine the degree to which using marginal land for energy crops is an approximately optimal rule. Our empirical results for an agricultural watershed in Iowa show that planting energy crops on marginal land is not likely to yield the highest valued output.

Cost impact of dynamically managing generation reserves

Generation reserves are needed to maintain the real time balance between power supply and power demand. Because power is noninventoriable, power generation follows power demand. Demand for power varies considerably depending on the time of day, day of the week and season. The predictable portion of power demand is met by purchasing firm energy on a day ahead or real time market. The random unpredictable portion of demand is met by purchasing a set of online and offline generation reserves on an ancillary market. The total energy purchasing cost includes payments for firm energy and payments for generation reserves. The latter include fixed capacity payments for reserve generation capacities and variable payments for the random energy produced from these reserves. The main contribution of this paper is to present an optimization model that captures the dynamism in the selection of the dispatch interval to determine the amount of firm energy and reserve capacities given a set of market prices. This is done by explicitly including in the model the duration of the dispatch period and the frequency this decision is reevaluated. In this model the randomness of the demand is captured by using a Doubly Truncated Normal Distribution. The cost incurred to activate generation reserves is modeled as a Poisson process. The total model captures the price differences from using different reserve sources. An empirical example is presented to illustrate the cost benefits of using the method proposed in this research with two different strategies: a static strategy and a dynamic strategy. It is shown that dynamically setting generation reserves results in cost savings.

The transition of the electricity system towards decarbonization: the need for change in the market regime

The mainstream community of energy experts is not aware of the long-term impacts that carbon policies directly concerned with promoting the development of low-carbon technologies produce on the electricity market regime. Long-term market coordination should be replaced by public coordination with long-term arrangements. The current market coordination makes carbon pricing ineffective in orienting investors towards capital-intensive low-carbon technologies. Fossil fuel generation technologies are preferred because their investment risks are much lower in the market regime, even with a high but unstable carbon price. Thus, in order to avoid delaying investment that is aimed at the decarbonization of the electricity system, a number of new market arrangements that lower the investment risk of low-carbon technologies and provide output-based subsidization have or are being selected by governments. As the use of low-carbon equipment to produce electricity develops, long-term market coordination for other technologies (e.g. peaking units, combined cycle gas turbine) will fade away because they alter the market price setting. Thus it is likely that, in the future, public coordination and planning will replace the decisions of market players not only for low-carbon technologies but also for every other type of capacity development. Policy relevance The development of renewables as promoted by both feed-in tariffs and green certificate obligations, which answer to different market failures, is well known. Similar long-term arrangements, which both subsidize and de-risk low-carbon investments for every small-sized and large-sized technology, shift learning costs and risks onto consumers. Energy experts and regulators have ignored that the expansion and generalization of these arrangements are changing the coordination function of the electricity markets. Apart from those in the UK, they are still unaware of the impacts that such technology-focused policies produce on the electricity market regime. The transition from market coordination to public coordination, which is inconsistent with the market principles of European electricity legislation, and long-term contracting is inevitable and should be anticipated.

Corporate Voting vs. Market Price Setting

This paper examines the relation between two means of information aggregation for corporations - corporate voting and stock market pricing. If the median voter and the price-setting shareholder share similar information sets, then the outcome of close proxy contests should not have a systematic effect on stock prices. The paper shows, however, that close dissident victories are associated with significant positive movements in stock prices, while close management victories are associated with negative stock price effects. The median voter values management control more highly than the price-setting shareholder. This suggests that voting and market pricing aggregate information in very different ways, with important implications for the role of voting and market pricing in corporate law and finance.

Corporate Voting versus Market Price Setting

This paper examines the relation between two means of corporate information aggregation�-corporate voting and stock market pricing. If the median voter and the price-setting shareholder share similar information, then close proxy contest outcomes should not have systematic effects on stock prices. The paper shows, however, that close dissident victories cause positive movements in stock prices, while close management victories lead to negative price effects. The median voter values management control more than the price-setting shareholder. Voting and market pricing aggregate information in very different ways, with important implications for the role of voting and market pricing in corporate law.

Are economists amoral? Contemporary economic thought and the distinction between values and prices

Underlying the “clash of cultures” between economists and the rest of the citizenry is a way of thinking about rationality, consumer choice and policy that periodically reveals a confusion between values and prices on the side of economists. Lawrence Summers' famous memo on the underpollution of the Third World was a case in point. Sadly, this was not an isolated incident. On the contrary, mainstream economists are conditioned, by the categories they employ, to regularly conflate value with price. This is particularly the case when it comes to theorizing about consumer choice and the meaning(s) to be ascribed to the set of market prices that emerge from the aggregate of these choices. This paper explores the dimensions of the problem and suggests other frameworks of choice that can enrich our understanding of consumer behavior and the significance of the set of prices that emerge in the market.

Constructing Binomial Trees From Multiple Implied Probability Distributions

Rubinstein9s seminal work on implied binomial trees showed how to fit a tree to a set of market prices for options maturing on a single date. A problem with the technique is that the tree it produces cannot match option prices for multiple maturities, so it cannot simultaneously cover a full set of options traded in a given market. The tree structure needed for that task is significantly more complex than a simple binomial. Brown and Toft show how such a general tree may be implied out of a set of option market prices. They then illustrate the technique using S&P 500 index options and currency options on the deutschemark. The resulting trees even embody patterns of path dependence commonly observed in volatilities.

Option-Implied Risk-Neutral Distributions and Implied Binomial Trees

Solving backward through an option pricing model to find the “implied volatility” (IV) that makes the model value equal the market price is a technique nearly as old as the Black-Scholes model itself. In fact, calculating the implied volatility yields the entire implied risk-neutral returns distribution: It is lognormal with mean equal to the riskless interest rate and constant volatility equal to IV. But research across many different options markets has shown clearly that neither implied nor empirical volatility is constant, and returns distributions appear to be far from lognormal. This has led to new theoretical pricing models that can incorporate non-constant volatility and more general returns distributions. It has also led to techniques for obtaining the entire risk-neutral returns distribution implied in a full set of market prices for options with different strikes and maturities. One of the most general and flexible approaches, first suggested by Rubinstein, is to construct an implied binomial tree.This article leads off our Symposium on the topic of implied distributions. In it, Jackwerth presents a comprehensive review of the literature on option-implied risk neutral distributions and implied valuation trees.