Regulation and efficiency in markets with friction

We analyse the efficiency of markets with friction, particularly power markets. We model the market as a dynamic system with {d<inf>t</inf>; t ≥ 0} the demand process and {s<inf>t</inf>; t ≥ 0} the supply process. Using stochastic differential equations to model the dynamics with friction, we investigate the efficiency of the market under an integrated expected cost function. Under this model, an efficiency-volatility tradeoff theorem is presented.

[1]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[2]  W. Fleming,et al.  Deterministic and Stochastic Optimal Control , 1975 .

[3]  D. Williams STOCHASTIC DIFFERENTIAL EQUATIONS: THEORY AND APPLICATIONS , 1976 .

[4]  T. Başar,et al.  Dynamic Noncooperative Game Theory , 1982 .

[5]  T. Bollerslev,et al.  Generalized autoregressive conditional heteroskedasticity , 1986 .

[6]  Frank L. Lewis,et al.  Optimal Control , 1986 .

[7]  W. Hogan Contract networks for electric power transmission , 1992 .

[8]  S. Heston A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options , 1993 .

[9]  Frank A. Wolak,et al.  Preliminary Report On the Operation of the Ancillary Services Markets of the California Independent , 1998 .

[10]  X. Zhou,et al.  Stochastic Controls: Hamiltonian Systems and HJB Equations , 1999 .

[11]  John N. Tsitsiklis,et al.  Congestion-dependent pricing of network services , 2000, TNET.

[12]  P. Hagan,et al.  MANAGING SMILE RISK , 2002 .

[13]  P. Navarro,et al.  Aftershocks and Essential Lessons - From the California Electricity Debacle , 2003 .

[14]  Peter E. Caines,et al.  Uplink power adjustment in wireless communication systems: a stochastic control analysis , 2004, IEEE Transactions on Automatic Control.

[15]  D. Bertsimas,et al.  Special Issue Papers: Dynamic pricing and inventory control for multiple products , 2005 .

[16]  J. M. Griffin,et al.  Electricity deregulation : choices and challenges , 2005 .

[17]  Houmin Yan,et al.  An Analysis of Staged Purchases in Deregulated Time-Sequential Electricity Markets , 2005 .

[18]  Hong Chen,et al.  Optimal Control and Competitive Equilibrium of Production-Inventory Systems with Application to the Petroleum Refining Industry , 2006 .

[19]  Sean P. Meyn,et al.  Efficiency and marginal cost pricing in dynamic competitive markets with friction , 2007, 2007 46th IEEE Conference on Decision and Control.

[20]  E. Mansur Measuring Welfare in Restructured Electricity Markets , 2007, The Review of Economics and Statistics.

[21]  E. Stacchetti,et al.  Investment dynamics in electricity markets , 2011 .