Anatomy of a model: Valuation of physical assets

This paper dissects the layers of valuation models for physical assets. While their joint functioning is crucial, the integrity of the layers is not always well understood. Rossen Roussev warns of the trend to over-engineer the parts and mis-model the whole

This paper assesses which models are applicable to what assets

When assessing the valuation of physical assets, the word ‘model' means many things to many people. To a quant it tends to be the problem of stochastic optimisation under complex constraints. To another quant – or the same one in a different context – it may be the use of stochastic processes to map the behaviour of commodity prices to a mathematical abstraction. The quant developer is concerned primarily with software implementations, their system representation and the requisite concerns about