Liquidity risks on power exchanges: a generalized Nash equilibrium model
Complementarity and equilibrium problems and variational inequalities (finite dimensions) (aspects of mathematical programming) (90C33) Noncooperative games (91A10) Auctions, bargaining, bidding and selling, and other market models (91B26) Stochastic models in economics (91B70) Spatial models in economics (91B72) Environmental economics (natural resource models, harvesting, pollution, etc.) (91B76) Derivative securities (option pricing, hedging, etc.) (91G20)
The authors consider the effect of limited liquidity in power exchange. They use a spatial stochastic equilibrium model for a financial market consisting of energy futures and financial transmission rights (FTRs) where agents can not hedge up to their desired level. The problem is formulated as a two-stage stochastic generalized Nash equilibrium with possibly multiple equilibria. For a large panel of solutions, the authors show how the risk premium and players profits are affected by illiquidity. Also it is shown that illiquidity in the FTR market affects the trades in the electricity futures markets.
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