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Stochastic modeling of electricity and related markets. (English) Zbl 1143.91002
Advanced Series on Statistical Science & Applied Probability 11. Hackensack, NJ: World Scientific (ISBN 978-981-281-230-8). xiv, 337 p. (2008).
Publisher’s description: 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.

MSC:
91-02 Research exposition (monographs, survey articles) pertaining to game theory, economics, and finance
60Kxx Special processes
91B26 Auctions, bargaining, bidding and selling, and other market models
91G20 Derivative securities (option pricing, hedging, etc.)
Software:
SOAR
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