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SUMMARY:Risk premium and stochastic equilibrium in generation capacity exp
 ansion models - Yves Smeers (Université Catholique de Louvain )
DTSTART:20190321T090000Z
DTEND:20190321T100000Z
UID:TALK121414@talks.cam.ac.uk
CONTACT:INI IT
DESCRIPTION:Investment<br>  in new capacities is most often based on a Wei
 ghted Average Cost of Capital<br>  where the cost of equities is derived f
 rom the Capital Asset Pricing Model<br>  (the cost of debt following a dif
 ferent logic). While a single corporate<br>  discount rate was most often 
 used in the past\, differentiated discount rates<br>  reflecting elements 
 such as technology and country risks are now more used.<br>  These introdu
 ce undesirable arbitrage phenomena in standard capacity<br>  expansion mod
 el interpreted as market simulation models. We discuss three<br>  types of
  differentiated discounting namely the standard (often based on CAPM)<br> 
  exogenous discount rate\, the more general stochastic discount rate and t
 he<br>  endogenous discount rate derived from risk functions possibly with
  hedging<br>  instruments. The three approaches are cast in a unifying ris
 k premium<br>  equilibrium formulationwhere arbitrage phenomena are elimin
 ated. The<br>  models are of the complementarity form and can be handled t
 hrough splitting<br>  algorithms. We report numerical results for medium s
 ize problems adequate for<br>  industrial use. Convergence is based on an(
 often implicit)<br>  assumption of monotonicity that is not necessarily sa
 tisfied for endogenous<br>  discount rates. We briefly discuss the differe
 nt equilibrium that can arise<br>  when this assumption is not satisfied.
LOCATION:Seminar Room 1\, Newton Institute
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