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Applications Of Stochastic Control In Energy Real Options And Market Illiquidity, Christian Maxwell

Electronic Thesis and Dissertation Repository

We present three interesting applications of stochastic control in finance. The first is a real option model that considers the optimal entry into and subsequent operation of a biofuel production facility. We derive the associated Hamilton Jacobi Bellman (HJB) equation for the entry and operating decisions along with the econometric analysis of the stochastic price inputs. We follow with a Monte Carlo analysis of the risk profile for the facility. The second application expands on the analysis of the biofuel facility to account for the associated regulatory and taxation uncertainty experienced by players in the renewables and energy industries. A …