Risk Spillovers and Hedging: Why Do Firms Invest Too Much in Systemic Risk?

In this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with incomplete financial markets which limit risk-sharing between market actors. Investments in productive assets affect the distribution of equilibrium prices and quantities, and create risk spillovers. From a societal perspective, entrants underinvest in technologies that would reduce systemic sector risk, and may overinvest in risk-increasing technologies. The inefficiency is shown to disappear when a complete financial market of tradable risk-sharing instruments is available, although the introduction of any individual tradable instrument may actually decrease efficiency. We therefore believe that sectors without well-developed financial markets will benefit from sector-specific regulation of investment decisions.investments in productive assets;hedging;systemic risk;risk spillovers

An edge-based approach for robust foreground detection

Foreground segmentation is an essential task in many image processing applications and a commonly used approach to obtain foreground objects from the background. Many techniques exist, but due to shadows and changes in illumination the segmentation of foreground objects from the background remains challenging. In this paper, we present a powerful framework for detections of moving objects in real-time video processing applications under various lighting changes. The novel approach is based on a combination of edge detection and recursive smoothing techniques.We use edge dependencies as statistical features of foreground and background regions and define the foreground as regions containing moving edges. The background is described by short- and long-term estimates. Experiments prove the robustness of our method in the presence of lighting changes in sequences compared to other widely used background subtraction techniques

Market completeness: How options affect hedging and investments in the electricity sector

The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when an increasing number of derivatives are introduced. It develops an equilibrium model of the electricity market with risk averse firms and a set of traded financial products, more specifically: a forward contract and an increasing number of options. We first show that aggregate welfare (the sum of individual firms' utility) increases with the number of derivatives offered, although most of the benefits are captured with one to three options. Secondly, power plant investments typically increase because additional derivatives enable better hedging of investments. However, the availability of derivatives sometimes leads to ‘crowding-out’ of physical investments because firms’ limited risk-taking capabilities are being used to speculate on financial markets. Finally, we illustrate that players basing their investment decisions on risk-free probabilities inferred from market prices, may significantly overinvest when markets are not sufficiently complet

Risk Management in Electricity Markets:Hedging and Market Incompleteness

Abstract: The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices. This paper studies how welfare and investment incentives are affected when markets for derivatives are introduced, and to what extent this depends on market completeness. First, we show that aggregate welfare in the market increases with the number of derivatives offered. If firms have liquidity constraints, option markets are particularly attractive from a welfare point of view. Second, we demonstrate that increasing the number of derivatives improves investment decisions of small firms, because additional financial markets signal how firms can reduce overall sector risk. Finally, we show that government intervention may be needed, because private investors may not have the right incentives to create the optimal number of markets.

Modelling large-scale CCS development in Europe linking technoeconomic modelling to transport infrastructure

This paper a studies the potential lay-out of CCS infrastructure in Europe, by combining techno-economic modelling of Europs\u27s electricity sector with a detailed modelling and analysis of a CO2 transport infrastructure. First, the electricity sector is described using the Chalmers Electricity Investment Model, which, for each EU member state, yields the technology mix including CCS - until the year 2050. The model gives the lowest system cost under a given CO2 emission reduction target. Thus, the model gives the annual flows of CO2 being captured by country and fuel. Secondly, these flows are used as input to InfraCCS, a cost optimization tool for bulk CO2 pipelines. Finally, the results from InfraCCS are applied along with Chalmers databases on power plants and CO2 storage sites to design the development over time of a detailed CO2 transport network across Europe considering the spatial distribution of power plants and storage locations. Two scenarios are studied: with and without onshore aquifer storage. The work shows that the spatial distribution of capture plants over time along with individual reservoir storage capacity and injectivity are key factors determining routing and timing of the pipeline network. The results of this work imply that uncertainties in timing for installation of capture equipment in combination with uncertainties related to accurate data on storage capacity and injectivity on reservoir level risk to seriously limit the build-up of large-scale pan-European CO2 transportation networks. The study gives that transport cost will more than double if aquifer storage is restricted to offshore reservoirs. Thus, it is found that the total investments for the pan-European pipeline system is € 31 billion.when storage in onshore aquifers is allowed and € 72 billion. if aquifer storage is restricted to offshore reservoirs with corresponding specific cost of € 5.1 to € 12.2 CO2 transported