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"Benth, Fred Espen, 1969-"
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Stochastic modelling of electricity and related markets
The markets for electricity, gas and temperature have distinctive features, which provide the focus for countless studies. For instance, electricity and gas prices may soar several magnitudes above their normal levels within a short time due to imbalances in supply and demand, yielding what is known as spikes in the spot prices. The markets are also largely influenced by seasons, since power demand for heating and cooling varies over the year. The incompleteness of the markets, due to nonstorability of electricity and temperature as well as limited storage capacity of gas, makes spot-forward hedging impossible. Moreover, futures contracts are typically settled over a time period rather than at a fixed date. All these aspects of the markets create new challenges when analyzing price dynamics of spot, futures and other derivatives.
eBook
Modeling and pricing in financial markets for weather derivatives
Weather derivatives provide a tool for weather risk management, and the markets for these exotic financial products are gradually emerging in size and importance. This unique monograph presents a unified approach to the modeling and analysis of such weather derivatives, including financial contracts on temperature, wind and rain. Based on a deep statistical analysis of weather factors, sophisticated stochastic processes are introduced modeling the time and space dynamics. Applying ideas from the modern theory of mathematical finance, weather derivatives are priced, and questions of hedging analyzed. The treatise contains an in-depth analysis of typical weather contracts traded at the Chicago Mercantile Exchange (CME), including so-called CDD and HDD futures. The statistical analysis of weather variables is based on a large data set from Lithuania.
eBook
Stochastic modelling of electricity and related markets
1. A survey of electricity and related markets. 1.1. The electricity markets. 1.2. The gas market. 1.3. The temperature market. 1.4. Other related energy markets. 1.5. Stochastic modelling of energy markets. 1.6. Outline of the book -- 2. Stochastic analysis for independent increment processes. 2.1. Definitions. 2.2. Stochastic integration with respect to martingales. 2.3. Random jump measures and stochastic integration. 2.4. The Lévy-Kintchine decomposition and semimartingales. 2.5. The Itô formula for semimartingales. 2.6. Examples of independent increment processes -- 3. Stochastic models for the energy spot price dynamics. 3.1. Introduction. 3.2. Spot price modelling with Ornstein-Uhlenbeck processes. 3.3. The autocorrelation function of multi-factor Ornstein-Uhlenbeck processes. 3.4. Simulation of stationary Ornstein-Uhlenbeck processes: a case study with the arithmetic spot model -- 4. Pricing of forwards and swaps based on the spot price. 4.1. Risk-neutral forward and swap price modelling. 4.2. Currency conversion for forward and swap prices. 4.3. Pricing of forwards. 4.4. Pricing of swaps -- 5. Applications to the gas markets. 5.1. Modelling the gas spot price. 5.2. Pricing of gas futures. 5.3. Inference for multi-factor processes -- 6. Modelling forwards and swaps using the Heath-Jarrow-Morton approach. 6.1. The HJM modelling idea for forward contracts. 6.2. HJM modelling of forwards. 6.3. HJM modelling of swaps. 6.4. The market models -- 7. Constructing smooth forward curves in electricity markets. 7.1. Swap and forward prices. 7.2. Maximum smooth forward curve. 7.3. Putting the algorithm to work -- 8. Modelling of the electricity futures market. 8.1. The Nord Pool market and financial contracts. 8.2. Preparing data sets. 8.3. Descriptive statistics. 8.4. A market model for electricity futures. 8.5. Principal component analysis. 8.6. Estimating a parametric multi-factor market model. 8.7. Normalised logreturns and heavy tails. 8.8. Final remarks -- 9. Pricing and hedging of energy options. 9.1. Pricing and hedging options on forwards and swaps. 9.2. Exotic options. 9.3. Case study: valuation of spark spread options a direct approach -- 10. Analysis of temperature derivatives. 10.1. Some preliminaries on temperature futures. 10.2. Modelling the dynamics of temperature. 10.3. Empirical analysis of Stockholm temperature dynamics. 10.4. Temperature derivatives pricing.
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