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When it was first published, this edited collection was a god-send for financial engineers in the electricity markets. Today, the definitive text is Eydeland and Wolyniec (2003). However, this remains an excellent supplement to that book. It offers alternative perspectives and clarifies some theoretical issues of financial engineering that Eydeland and Wolyniec pass over. It also offers more extensive empirical analyses of how various diffusion processes mimic the behavior of power prices. Articles are sophisticated, well written and extensively referenced. The book is divided into two sections:
Johnson and Barz contribute an excellent article on selecting diffusion processes for modeling electricity prices. They compare the strengths and weaknesses of
Each model is assessed with and without a jump process, so eight models are covered in all. |
Hamdan's article "Option pricing in the electricity markets" clarifies, in the language of financial engineering, what it is that makes electricity derivatives unique. The discussion is practical and details implications for the pricing and hedging of power derivatives. Eydeland and Geman explain the challenges of pricing monthly, daily and hour-ahead options. There are articles on production-based and fuel-based pricing methodologies, market structure, trading strategies for plant operators—11 chapters in all. The book is essential reading for financial engineers in the electricity markets. Not only is the content superb, but you will want to follow-up on the many references cited in the text. [Review based on the first edition.]
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Modeling Energy and Power Prices
