By Fred Espen Benth
The markets for electrical energy, fuel and temperature have targeted positive factors, which offer the point of interest for numerous stories. for example, electrical energy and fuel costs could bounce numerous magnitudes above their basic degrees inside of a little while because of imbalances in offer and insist, yielding what's often called spikes within the spot costs. The markets also are mostly stimulated by way of seasons, for the reason that strength call for for heating and cooling varies over the yr. The incompleteness of the markets, because of nonstorability of electrical energy and temperature in addition to restricted garage potential of gasoline, makes spot-forward hedging most unlikely. in addition, futures contracts tend to be settled over a period of time instead of at a set date. these kinds of points of the markets create new demanding situations while reading cost dynamics of spot, futures and different derivatives.
This publication offers a concise and rigorous therapy at the stochastic modeling of power markets. Ornstein Uhlenbeck procedures are defined because the uncomplicated modeling instrument for spot fee dynamics, the place recommendations are pushed by way of time-inhomogeneous bounce techniques. Temperature futures are studied in accordance with a continual higher-order autoregressive version for the temperature dynamics. the idea awarded the following can pay specific realization to the seasonality of volatility and the Samuelson influence. Empirical experiences utilizing information from electrical energy, temperature and gasoline markets are given to hyperlink concept to perform.
Contents: A Survey of electrical energy and similar Markets; Stochastic research for autonomous Increment strategies; Stochastic versions for the power Spot fee Dynamics; Pricing of Forwards and Swaps in response to the Spot rate; purposes to the gasoline Markets; Modeling Forwards and Swaps utilizing the Heath Jarrow Morton technique; developing gentle ahead Curves in electrical energy Markets; Modeling of the electrical energy Futures marketplace; Pricing and Hedging of strength recommendations; research of Temperature Derivatives.
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Additional resources for Stochastic Modeling of Electricity and Related Markets
N, where t0 = 0 and tn = τ2 . Next, we assume that we have a discretely defined filtration Fti associated to the spot process. This is naturally enlarged to all times t by setting Ft = Fti for t ∈ [ti , ti+1 ), which means that there is no new information coming from the spot price process before next time instance ti+1 . This implies that F (t, τ1 , τ2 ) = EQ = EQ 1 τ2 − τ1 1 τ2 − τ1 τ2 −1 ti =τ1 S(ti ) | Ft τ2 −1 ti =τ1 S(ti ) | Fti = F (ti , τ1 , τ2 ) . Hence, the electricity futures price becomes constant over each hour, that is, it becomes a time series process rather than a continuous-time stochastic January 22, 2008 14:7 WSPC/Book Trim Size for 9in x 6in A Survey of Electricity and Related Markets book 31 process.
In particular, [Bjerksund, Rasmussen and Stensland (2000)], [Keppo et al. (2004)], [Benth and Koekebakker (2005)] and [Kiesel, Schindlmayer and B¨ orger (2006)] have done this for the contracts in the Nord Pool and EEX electricity markets, while a discussion of the approach to general energy markets can be found in [Clewlow and Strickland (2000)]. Note that both [Bjerksund, Rasmussen and Stensland (2000)] and [Clewlow and Strickland (2000)] suggest to use the HJM approach to model forward contracts, while in [Benth and Koekebakker (2005)] electricity futures, the actual contracts traded in the market, are considered.
The algorithm may be applied to gas markets as well. We demonstrate the algorithm at work on Nord Pool electricity futures data, and further apply it to study the term structure of volatility of electricity. The smoothing algorithm is also applied in Chapter 8, where we empirically analyse the Nord Pool electricity futures market using HJM-based models. The smoothing algorithm enables us to derive a data set which is structured and more easy to use in an empirical investigation of the market. A principal component analysis reveals certain structures for the short- and long-term market, and motivate a parametric multi-factor market model, including seasonal volatility with maturity effect.