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R. Kovacevic:
"Arbitrage conditions for electricity markets with production and storage";
Research Reports (Vienna University of Technology, Institute of Statistics and Mathematical Methods in Economics, Operations Research and Control Systems), 2020-03 (2020), 03; 20 pages.

This work analyzes the notion of arbitrage for market models with electricity pro-duction from fuel. Several generators, fuel storage, and the related fuel and storage costs are considered. Based on stochastic optimization in Banach spaces, a necessary and a sufficientno-arbitrage condition in terms of stochastic discount factors are derived and analyzed further inthe context of (potentially nonlinear) vector-autoregressive price models with additive residuals. For this large class of statistical models, it is found that both the necessary and the sufficientcondition can be rejected only in very rare cases. Finally, the consequences of these findings for contract valuation and for tree construction in the stochastic optimization context are analyzed.

Electricity production, arbitrage, stochastic discount factor, duality theory.

https://publik.tuwien.ac.at/files/publik_289699.pdf