Stochastic Modeling and Pricing in Energy Markets

A special issue of Risks (ISSN 2227-9091).

Deadline for manuscript submissions: closed (20 November 2021) | Viewed by 9848

Special Issue Editor


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Guest Editor
Department of Mathematics, University of Oslo, 0316 Blindern, Norway
Interests: stochastic analysis; mathematical finance; energy and commodity markets

Special Issue Information

Dear Colleagues,

Power markets undergo changes to adapt to a green economy and meet the future energy demand. The mix of carbon-fueled production and nuclear and renewable energy makes the supply side dependent on other commodity markets (like gas and coal), and weather factors (like sun, wind, and precipitation). New risk management instruments are appearing in the market, such as wind futures, alongside with more traditional weather derivatives on temperature.

In this Special Issue, we focus on the stochastic modeling of the price formations in energy markets, including power, gas, and oil, together with the factors affecting these markets, like weather. Power are traded on day-ahead, intraday, and futures markets, where prices have different characteristics, and modeling faces different challenges. Risk management and optimization, including hedging and derivatives, are included as important aspects of energy market modeling. There is a particular interest in multivariate models taking into account the connections between various markets and factors, but also the high-dimensionality of forward curves. Further, novel use of machine learning techniques and analysis and development of algorithmic trading are relevant.

We welcome high-quality papers addressing one or more of the aspects presented above. Submitted papers will undergo the usual review process, after being selected based on relevance criteria for the Special Issue.

Prof. Dr. Fred Espen Benth
Guest Editor

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Keywords

  • Power markets
  • intra-day, day-ahead, and futures
  • Stochastic processes
  • Derivatives Risk management
  • Multivariate modeling

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Published Papers (3 papers)

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Research

19 pages, 429 KiB  
Article
The Effect of Mean-Reverting Processes in the Pricing of Options in the Energy Market: An Arithmetic Approach
by Maren Diane Schmeck and Stefan Schwerin
Risks 2021, 9(5), 100; https://doi.org/10.3390/risks9050100 - 18 May 2021
Cited by 3 | Viewed by 2711
Abstract
In this paper we study the effect that mean-reverting components in the arithmetic dynamics of electricity spot price have on the price of a call option on a swap. Our model allows for seasonal effects, spikes, and negative values of the price of [...] Read more.
In this paper we study the effect that mean-reverting components in the arithmetic dynamics of electricity spot price have on the price of a call option on a swap. Our model allows for seasonal effects, spikes, and negative values of the price of electricity. We show that for sufficiently large delivery periods of the swap contract, the error that one makes by neglecting some of the mean-reverting processes affecting the spot price evolution converges to zero. The decay rate is explicitly calculated. This is achieved by exploiting the additive structure of the electricity price process in order to determine an explicit closed-form formula for the price of the call on a swap. The theoretical analysis is then illustrated via a numerical example. Full article
(This article belongs to the Special Issue Stochastic Modeling and Pricing in Energy Markets)
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21 pages, 552 KiB  
Article
Price Formation and Optimal Trading in Intraday Electricity Markets with a Major Player
by Olivier Féron, Peter Tankov and Laura Tinsi
Risks 2020, 8(4), 133; https://doi.org/10.3390/risks8040133 - 7 Dec 2020
Cited by 14 | Viewed by 3254
Abstract
We study price formation in intraday electricity markets in the presence of intermittent renewable generation. We consider the setting where a major producer may interact strategically with a large number of small producers. Using stochastic control theory, we identify the optimal strategies of [...] Read more.
We study price formation in intraday electricity markets in the presence of intermittent renewable generation. We consider the setting where a major producer may interact strategically with a large number of small producers. Using stochastic control theory, we identify the optimal strategies of agents with market impact and exhibit the Nash equilibrium in a closed form in the asymptotic framework of mean field games with a major player. Full article
(This article belongs to the Special Issue Stochastic Modeling and Pricing in Energy Markets)
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23 pages, 2190 KiB  
Article
Managing Meteorological Risk through Expected Shortfall
by Silvana Stefani, Gleda Kutrolli, Enrico Moretto and Sergei Kulakov
Risks 2020, 8(4), 118; https://doi.org/10.3390/risks8040118 - 10 Nov 2020
Cited by 2 | Viewed by 2930
Abstract
This paper focuses on weather derivatives as efficient risk management instruments and proposes a more advanced approach for their pricing. An “hybrid” contract is introduced, combining insurance properties, specifically tailored for the region under study and introducing Value-at-Risk (VaR) and Expected Shortfall (ES) [...] Read more.
This paper focuses on weather derivatives as efficient risk management instruments and proposes a more advanced approach for their pricing. An “hybrid” contract is introduced, combining insurance properties, specifically tailored for the region under study and introducing Value-at-Risk (VaR) and Expected Shortfall (ES) as appropriate measures for the strike price. The numerical results show that VaR and ES are both efficient ways for managing the so-called Tail Risk; further, being ES more conservative than VaR and due to its subadditivity property, it can be seen that seasonal contracts are generally better off than monthly contracts in reducing global risk. Full article
(This article belongs to the Special Issue Stochastic Modeling and Pricing in Energy Markets)
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