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Modelling Electricity Swaps With Stochastic Forward Premium Models
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Book Synopsis Modelling Electricity Swaps with Stochastic Forward Premium Models by : Iván Blanco
Download or read book Modelling Electricity Swaps with Stochastic Forward Premium Models written by Iván Blanco and published by . This book was released on 2017 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a new model for pricing electricity swaps. Two general factors affect all contracts but unique risk factors affect each contract. General factors are average swap prices and deterministic trend-seasonal components, and unique factors are forward premiums. Innovations follow MNIG distributions. We estimate the model with data from the European Energy Exchange. The model outperforms four competitors, both in in-sample valuation and in out-of-sample forecasting, and in fitting the term structure of volatilities by market segments. Competitor models are (i) diffusion spot prices, (ii) jump-diffusion spot prices with time dependent volatility, (iii) HJM-based and (iv) Lévy multifactor model with NIG distributions. Value-at-Risk measures based on normality strongly underestimate tail risk whereas our model gives estimates that are more accurate.
Book Synopsis Stochastic Modelling of Electricity and Related Markets by : Fred Espen Benth
Download or read book Stochastic Modelling of Electricity and Related Markets written by Fred Espen Benth and published by World Scientific. This book was released on 2008 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.This book provides a concise and rigorous treatment on the stochastic modeling of energy markets. Ornstein?Uhlenbeck processes are described as the basic modeling tool for spot price dynamics, where innovations are driven by time-inhomogeneous jump processes. Temperature futures are studied based on a continuous higher-order autoregressive model for the temperature dynamics. The theory presented here pays special attention to the seasonality of volatility and the Samuelson effect. Empirical studies using data from electricity, temperature and gas markets are given to link theory to practice.
Book Synopsis Stochastic Modeling Of Electricity And Related Markets by : Fred Espen Benth
Download or read book Stochastic Modeling Of Electricity And Related Markets written by Fred Espen Benth and published by World Scientific. This book was released on 2008-04-14 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.This book provides a concise and rigorous treatment on the stochastic modeling of energy markets. Ornstein-Uhlenbeck processes are described as the basic modeling tool for spot price dynamics, where innovations are driven by time-inhomogeneous jump processes. Temperature futures are studied based on a continuous higher-order autoregressive model for the temperature dynamics. The theory presented here pays special attention to the seasonality of volatility and the Samuelson effect. Empirical studies using data from electricity, temperature and gas markets are given to link theory to practice.
Book Synopsis Stochastic Models for Prices Dynamics in Energy and Commodity Markets by : Fred Espen Benth
Download or read book Stochastic Models for Prices Dynamics in Energy and Commodity Markets written by Fred Espen Benth and published by Springer Nature. This book was released on 2023-11-16 with total page 250 pages. Available in PDF, EPUB and Kindle. Book excerpt: This monograph presents a theory for random field models in time and space, viewed as stochastic processes with values in a Hilbert space, to model the stochastic dynamics of forward and futures prices in energy, power, and commodity markets. In this book, the well-known Heath–Jarrow–Morton approach from interest rate theory is adopted and extended into an infinite-dimensional framework, allowing for flexible modeling of price stochasticity across time and along the term structure curve. Various models are introduced based on stochastic partial differential equations with infinite-dimensional Lévy processes as noise drivers, emphasizing random fields described by low-dimensional parametric covariance functions instead of classical high-dimensional factor models. The Filipović space, a separable Hilbert space of Sobolev type, is found to be a convenient state space for the dynamics of forward and futures term structures. The monograph provides a classification of important operators in this space, covering covariance operators and the stochastic modeling of volatility term structures, including the Samuelson effect. Fourier methods are employed to price many derivatives of interest in energy, power, and commodity markets, and sensitivity 'delta' expressions can be derived. Additionally, the monograph covers forward curve smoothing, the connection between forwards with fixed delivery and delivery period, as well as the classical theory of forward and futures pricing. This monograph will appeal to researchers and graduate students interested in mathematical finance and stochastic analysis applied in the challenging markets of energy, power, and commodities. Practitioners seeking sophisticated yet flexible and analytically tractable risk models will also find it valuable.
Book Synopsis Stochastic Modelling and Pricing of Electricity and Related Markets' Contracts with Local Stochastic Delayed and Jumped Volatilities by : Anatoliy V. Swishchuk
Download or read book Stochastic Modelling and Pricing of Electricity and Related Markets' Contracts with Local Stochastic Delayed and Jumped Volatilities written by Anatoliy V. Swishchuk and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we study stochastic models for electricity, gas and temperature markets' contracts with delay and jumps. The basic products in these markets are spot, futures and forward contracts, swaps and options written on these. We concentrate our study on pricing of these kind of contracts. We also study optimal control of stochastic differential delay equations (SDDEs) with jumps and its applications in energy markets and economics.
Book Synopsis Spot Price Modeling and the Valuation of Electricity Forward Contracts by : Álvaro Cartea
Download or read book Spot Price Modeling and the Valuation of Electricity Forward Contracts written by Álvaro Cartea and published by . This book was released on 2013 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium.
Book Synopsis Stochastic Modelling of Electricity and Related Markets by : Fred Espen Benth
Download or read book Stochastic Modelling of Electricity and Related Markets written by Fred Espen Benth and published by World Scientific. This book was released on 2008 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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. This book provides a concise and rigorous treatment on the stochastic modeling of energy markets. OrnsteinOCoUhlenbeck processes are described as the basic modeling tool for spot price dynamics, where innovations are driven by time-inhomogeneous jump processes. Temperature futures are studied based on a continuous higher-order autoregressive model for the temperature dynamics. The theory presented here pays special attention to the seasonality of volatility and the Samuelson effect. Empirical studies using data from electricity, temperature and gas markets are given to link theory to practice. Sample Chapter(s). A Survey of Electricity and Related Markets (331 KB). Contents: A Survey of Electricity and Related Markets; Stochastic Analysis for Independent Increment Processes; Stochastic Models for the Energy Spot Price Dynamics; Pricing of Forwards and Swaps Based on the Spot Price; Applications to the Gas Markets; Modeling Forwards and Swaps Using the HeathOCoJarrowOCoMorton Approach; Constructing Smooth Forward Curves in Electricity Markets; Modeling of the Electricity Futures Market; Pricing and Hedging of Energy Options; Analysis of Temperature Derivatives. Readership: Researchers in energy and commodity markets, and mathematical finance.
Book Synopsis Stochastic Volatility Models for the European Electricity Markets by : Per Bjarte Solibakke
Download or read book Stochastic Volatility Models for the European Electricity Markets written by Per Bjarte Solibakke and published by . This book was released on 2014 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper builds and implements a multifactor stochastic volatility model for the latent (and observable) volatility from the quarter and year forward contracts at the NASDAQ OMX Commodity Exchanges, applying Bayesian Markov chain Monte Carlo simulation methodologies for estimation, inference, and model adequacy assessment. Stochastic volatility is the main way time-varying volatility is modelled in financial markets. An appropriate scientific model description, specifying volatility as having its own stochastic process, broadens the applications into derivative pricing purposes, risk assessment and asset allocation and portfolio management. From an estimated optimal and appropriate stochastic volatility model, the paper reports risk and portfolio measures, extracts conditional one-step-ahead moments (smoothing), forecast one-step-ahead conditional volatility (filtering), evaluates shocks from conditional variance functions, analyses multi-step-ahead dynamics, and calculates conditional persistence measures. (Exotic) option prices can be calculated using the re-projected conditional volatility. Observed market prices and implied volatilities establish market risk premiums. The analysis adds insight and enables forecasts to be made, building up the methodology for developing valid scientific commodity market models.
Book Synopsis Electricity Price Modeling with Stochastic Time Change by : Svetlana Borovkova
Download or read book Electricity Price Modeling with Stochastic Time Change written by Svetlana Borovkova and published by . This book was released on 2015 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we develop a novel approach to electricity price modelling, based on the powerful technique of stochastic time change. This technique allows us to incorporate the characteristic features of electricity prices (such as seasonal volatility, time-varying mean reversion and seasonally occurring price spikes) into the model in an elegant and economically justifiable way. The stochastic time change introduces stochastic as well as deterministic (e.g., seasonal) features in the price process' volatility and in the jump component.We specify the base process as a mean reverting jump diffusion and the time change as an absolutely continuous stochastic process with seasonal component. The activity rate of the stochastic time change can be related to the factors that influence supply and demand. Here we see the temperature as a proxy for the demand and hence, as the driving factor of the stochastic time change, and show that this choice leads to realistic price paths. We derive properties of the resulting price process and develop the model calibration procedure. We calibrate the model to the historical EEX power prices and apply it to generating price paths by Monte Carlo simulations.We show that the simulated price process excellently matches the distributional characteristics of the observed electricity prices.
Book Synopsis Financial Mathematics, Volatility and Covariance Modelling by : Julien Chevallier
Download or read book Financial Mathematics, Volatility and Covariance Modelling written by Julien Chevallier and published by Routledge. This book was released on 2019-06-28 with total page 344 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides an up-to-date series of advanced chapters on applied financial econometric techniques pertaining the various fields of commodities finance, mathematics & stochastics, international macroeconomics and financial econometrics. Financial Mathematics, Volatility and Covariance Modelling: Volume 2 provides a key repository on the current state of knowledge, the latest debates and recent literature on financial mathematics, volatility and covariance modelling. The first section is devoted to mathematical finance, stochastic modelling and control optimization. Chapters explore the recent financial crisis, the increase of uncertainty and volatility, and propose an alternative approach to deal with these issues. The second section covers financial volatility and covariance modelling and explores proposals for dealing with recent developments in financial econometrics This book will be useful to students and researchers in applied econometrics; academics and students seeking convenient access to an unfamiliar area. It will also be of great interest established researchers seeking a single repository on the current state of knowledge, current debates and relevant literature.
Book Synopsis Modelling Prices in Competitive Electricity Markets by : Derek W. Bunn
Download or read book Modelling Prices in Competitive Electricity Markets written by Derek W. Bunn and published by John Wiley & Sons. This book was released on 2004-04-02 with total page 368 pages. Available in PDF, EPUB and Kindle. Book excerpt: Electricity markets are structurally different to other commodities, and the real-time dynamic balancing of the electricity network involves many external factors. Because of this, it is not a simple matter to transfer conventional models of financial time series analysis to wholesale electricity prices. The rationale for this compilation of chapters from international authors is, therefore, to provide econometric analysis of wholesale power markets around the world, to give greater understanding of their particular characteristics, and to assess the applicability of various methods of price modelling. Researchers and professionals in this sector will find the book an invaluable guide to the most important state-of-the-art modelling techniques which are converging to define the special approaches necessary for unravelling and forecasting the behaviour of electricity prices. It is a high-quality synthesis of the work of financial engineering, industrial economics and power systems analysis, as they relate to the behaviour of competitive electricity markets.
Book Synopsis Constrained Capacity and Equilibrium Forward Premia in Electricity Markets by : Carl J. Ullrich
Download or read book Constrained Capacity and Equilibrium Forward Premia in Electricity Markets written by Carl J. Ullrich and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper extends the equilibrium electricity pricing model in Bessembinder and Lemmon (2002). The new model accounts for constrained capacity, an important feature in electricity markets. Explicitly including a role for capacity allows the model to reproduce the price spikes observed in wholesale electricity markets using reasonable parameter values. The model implies that the equilibrium forward premium, defined to be the forward price minus the expected spot price, is decreasing in spot price variance when the expected spot price is low, but is increasing in the spot price variance when the expected spot price is high. I extend the empirical work in Longstaff and Wang (2004) and show that data from the Pennsylvania-New Jersey-Maryland (PJM) market support these model predictions.
Book Synopsis Stochastic Modelling of Volatility and Inter-relationships in the Australian Electricity Markets by : Joanna (Jia Jia) Wang
Download or read book Stochastic Modelling of Volatility and Inter-relationships in the Australian Electricity Markets written by Joanna (Jia Jia) Wang and published by . This book was released on 2020 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: To model the price and price volatilities of the Australian wholesale spot electricity markets, the univariate generalised autoregressive conditional heteroskedasticity (GARCH) models have been applied and the inter-relationships in these markets are modelled using multivariate GARCH models. Stochastic volatility (SV) models, as flexible alternatives to GARCH models, have demonstrated their superiority in many financial applications. However, the use of SV models in the modelling of electricity markets is still quite limited. This paper investigates existing multivariate SV models and proposes new SV models with skew error distributions, to model the price and price volatilities of three pairs of markets, selected from four regional electricity markets in Australia, which are shown to be highly correlated in a previous study (Higgs, 2009). Bayesian approach using Markov chain Monte Carlo (MCMC) method is adopted and model implementation is done using the software OpenBUGS. Empirical results show that the price and volatilities of selected markets are strongly correlated across different pairs of regional markets. Based on Deviance Information Criterion, the models with skew error distributions perform better than those with symmetric distribution.
Book Synopsis Stochastic modelling of long-term electricity forward prices by : Martin Povh
Download or read book Stochastic modelling of long-term electricity forward prices written by Martin Povh and published by . This book was released on 2009 with total page 156 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Stochastic Modeling of Intraday Electricity Markets by : Cassandra Milbradt
Download or read book Stochastic Modeling of Intraday Electricity Markets written by Cassandra Milbradt and published by . This book was released on 2023* with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Englische Version: Limit order books are the standard instrument for price formation in modern financial markets. While electricity has traditionally been traded through auctions, there are intraday electricity markets, such as the SIDC market, in which buyers and sellers meet via limit order books. In this thesis, stochastic models of limit order books are developed based on the underlying market microstructure. A particular focus is set on incorporating unique characteristics of intraday electricity markets, some of which are quite different from those of financial markets. The developed models in this thesis start with a realistic and microscopic description of the market dynamics. Large price changes over short time periods are considered, as well as limited cross-border activities. These microscopic models are generally computationally too intensive for practical applications. The main goal of this thesis is therefore to derive suitable approximations of these microscopic models by so-called scaling limits. For this purpose, appropriate scaling assumptions are carefully formulated and incorporated into the microscopic models which allow us to study their high-frequency behavior when the size of an individual order converges to zero while the order arrival rate tends to infinity. Calibration of mathematical models is one of the main concerns from a practitioner's point of view. It is well known that change points (abrupt variations) are present in high-frequency financial data. If they are caused by endogenous effects, the dependence on the underlying data must be considered when estimating such change points. In the final part of this thesis, we extend the existing literature on change point detection so that random change points depending on the data can also be handled.
Book Synopsis Modeling Electricity Price and Quantity Uncertainty by : Alfredo Trespalacios
Download or read book Modeling Electricity Price and Quantity Uncertainty written by Alfredo Trespalacios and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Energy purchases/sales in liberalized markets are subject to price and quantity uncertainty, which should be jointly modeled by relaxing the unreliable normality assumption for capturing risk. In this paper, we consider the spot price and energy generation to follow a bivariate semi-nonparametric distribution defined in terms of the Gram-Charlier expansion. This distribution allows to jointly model not only mean, variance, and correlation, but also skewness, kurtosis, and higher-order moments. Based on this model, we propose a static hedging strategy for electricity generators that participate in a competitive market where hedging is carried out through forward contracts that include a risk premium in their valuation. For this purpose, we use Monte Carlo simulation and consider information from the Colombian electricity market as the case study. The results show that the volume of energy to be sold under long-term contracts depends on each electricity generator and the risk assessment made by the market in the Forward Risk Premium. The conditions of skewness, kurtosis, and correlation, as well as the type of risk indicator to be employed, affect the hedging strategy that each electricity generator should implement.
Book Synopsis Modelling Electricity Prices with Forward Looking Capacity Constraints by : Álvaro Cartea
Download or read book Modelling Electricity Prices with Forward Looking Capacity Constraints written by Álvaro Cartea and published by . This book was released on 2013 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a spot price model for wholesale electricity prices which incorporates forward looking information that is available to all market players. We focus on information that measures the extent to which the capacity of the England and Wales generation park will be constrained over the next 52 weeks. We propose a measure of 'tight market conditions', based on capacity constraints, which identifies the weeks of the year when price spikes are more likely to occur. We show that the incorporation of this type of forward looking information, not uncommon in the electricity markets, improves the modeling of spikes (timing and magnitude) and the different speeds of mean reversion.
