Hydroelectric Real Options: A Structural Estimation Approach

Abstract

Structural estimation is an important technique in analyzing economic data. Unfortunately, it is often computationally expensive to implement the most powerful and efficient statistical methods. One such method is the Nested Fixed Point (NFXP) algorithm. In this thesis, we develop methodology and techniques that allow us to apply NFXP to real options models of hy- dropower production. In particular, we develop a way to regard hydropower planning and scheduling as a stationary problem. Further, we create a nu- merical method for solving specific types of equation systems with sparse matrices of a specific structure, an approach that significantly increases the speed with which we can compute Fréchet and partial derivatives of con- traction mappings for large state spaces.