Average Reviews:
(More customer reviews)I am currently working as a quant in one of the larger energy companies.
All in all, I find the book among the most versatile and to the point in day to day challenges for quants in the energy market. It has a really good balance and connection between theory, real life markets and challenges and empirical findings. You should be fairly accustomed to Stochastic calculus (e.g. Ito-calc) to benefit from the technical chapters in the book.
The book is very systematic and pedagogic in its form combined with a very theoretic core. Opposed to many similar books, the text around the mathematics is guiding you in your decisions and literally full of references which will help you further in solving problems in the real world. An especially good thing about the text is all small hints on how you should set up the model to stay out of trouble on a later stage in the modeling. May save you a lot of work and irritations on a later stage.
The book looks at two different model approaches (geometric and arithmetic), and gives good information about each approach throughout the text, such as limitations, advantages and parameter estimation. It also uses three markets as example markets: power, gas and temperature. All markets are modeled and discussed extensively, and at this level of mathematical modeling I believe this is the most concise treatment of weather derivatives publicly available. It has a chapter alone dedicated to modeling of weather derivatives, with empirical results.
The book explains forward curve generation and smoothing principles in details, and also gives estimated parameters for a real life example. It has own sections for the market price of risk, both from the practical and theoretical side, and also shows how to model spikes and the authors success with different approaches catching the heavy tales and spikes.
The book takes you through options and hedging such that it is easy applicable to many of the deal structures containing flex or optionality. It includes theory and empirical results for standard options with jumps, but also spread and Asian options, and a direct approach for spark spread options.
Click Here to see more reviews about: Stochastic Modeling of Electricity and Related Markets (Advanced Series on Statistical Science and Applied Probability)
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.
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 Heath Jarrow Morton Approach; Constructing Smooth Forward Curves in Electricity Markets; Modeling of the Electricity Futures Market; Pricing and Hedging of Energy Options; Analysis of Temperature Derivatives.
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