Real Asset Valuation Based on Spot Prices: Can We Forget About Market Fundamentals?


Corinne Chaton, Laure Durand-Viel

Real assets are usually valued by assuming a liquid spot market with competitive traders who buy or sell until arbitrage opportunities are exhausted; the value of a real asset is computed as the stream of profits resulting from such transactions. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. This paper analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised model of the natural gas market with two types of oligopolistic players: pure traders and suppliers with downstream customers. We compute the trading valuation and the supplier valuation of storage capacity. Comparing the latter value with the value obtained under the traditional, price-taking assumption reveals a systematic bias that tends to induce under-investment.


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