Hello, I am currently working on models where energy can be produced using either a clean or dirty technology and investment (in knowledge) reduces the average cost of the clean technology or backstop. A steady state involves using both the dirty and clean technologies when their marginal costs are equal.
I am thinking of including a stochastic process for change in energy prices such that investment in the backstop is feasible only when energy prices are above a certain level (that is to say, investment in knowledge now reduces the future average cost of the backstop but there is also a huge fixed cost in actually using the backstop). Theoretically, I believe that this would involve switching back and forth between clean and dirty technologies. I am looking for any ideas in how to model this. I am attaching my recent publication (basically including stochasticity as I said in my current model).
I am interested in collaborating! any ideas?
Supratim
Hello, which formalism you are using?
...e.g., in HMM you can fit your model using a specific version of the EM algorithm (Baum-Welch). Although there are many EM variants and some of then have a Stochastic layer between the Expectation and Maximization layers. If you are using HMM it will be relatively easy to change the algorithm, otherwise you can get some ideas by looking into the EM stochastic derivations.
Hi Joaquim, thanks for your answer! I am not aware of the Baum-Welch algorithm but would definitely look into it.
I would definitely be in touch if I need more help regarding the stochastic derivation of my model.
Supratim
Hi George, thanks for your answer...I would definitely look into it. At the moment, I am reading a book entitled "Investment Under Uncertainty" by Dixit and Pindyck. Its quite helpful regarding explaining option values and value of portfolios under uncertainty over price movements.
This literature on (investment under) uncertainty is definitely new to me...
Supratim
Supratim, due you are not familiar with this formalism, the best thing is follow George's suggestion and search about it. Search also about Hidden Markovian models (HMM) and you shall converge to the same thing, although with more material available in your search. My first commentary is about some advanced things inside this formalism; thus, I strongly suggest you to start your search by "Markovian process" and "Hidden Markovian Models".
Thanks Joaquim!! I would definitely look into it.
Are you a PhD student in Computer Science (your recent paper: A DIMENSIONALITY REDUCTION PROCESS TO FORECAST EVENTS) looks quite interesting. I am an Economist but am very interested in numerical simulations. If you have the time in future, may be we can work on something together!
Supratim
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