Timetable http://www.fam.tuwien.ac.at/events/

This Friday there are two talks from guests from Germany. Both applied for the open position in our department.

Fr, 11.07.2003, 9:30, Sem 107 Juri Hinz (Eberhard-Karls Universität Tübingen, D) ''Modeling electricity auctions''

Fr, 11.07.2003, 14:30, Sem 107 Angelika Esser (Goethe University, Frankfurt, D) ''Modeling feedback effects with stochastic liquidity''

Abstracts:

Juri Hinz (Eberhard-Karls Universität Tübingen, D) ''Modeling electricity auctions'' The recent worldwide introduction of competition to electricity production and trading raises a number of interesting problems concerning optimal market design, risk estimation, and strategy optimization for power producers. We address the last problem, discussing an auction model which captures key features of real-time electricity trading. It turns out that, under certain conditions, the expected total payment to electricity producers is independent on particular auction type. This result is similar to the revenue equivalence theorem for classical auctions and could help to compare different electricity auction formats.

Angelika Esser (Goethe University, Frankfurt, D) ''Modeling feedback effects with stochastic liquidity'' We model the interactions between the trading activities of a large investor, the stock price, and the market liquidity. Our framework generalizes the model of Frey (2000) where liquidity is constant by introducing a stochastic liquidity factor. This innovation has two implications. First, we can analyse trading strategies for the large investor that are affected by a changing market depth. Second, the sensitivity of stock prices to the trading strategy of the large investor can vary due to changes in liquidity. Features of our model are demonstrated using Monte Carlo simulation for different scenarios. The flexibility of our framework is illustrated by an application that deals with the pricing of a liquidity derivative. The claim under consideration compensates a large investor who follows a stop loss strategy for the liquidity risk that is associated with a stop loss order. The derivative matures when the asset price falls below a stop loss limit for the first time and then pays the price difference between the asset price immediately before and after the execution of the stop loss order. The setup to price the liquidity derivative is calibrated for one example using real world limit order book data so that one gets an impression about the order of magnitude of the liquidity effect.