Project CEMAPRE internal
| Title | Pricing of Financial Instruments in Emission Markets |
| Participants | André M. Bento, Nuno Brites, Joaquim Cavalheiro, Matthias Ehrhardt, Maria do Rosário Grossinho, Manuel Guerra, João Guerra (Principal Investigator), Henrique Guerreiro, Michael Gunther, João Janela, Carlos Oliveira, Long Teng |
| Summary | The aim of this project is to propose some generalizations/modifications of structural models and numerical methods previously presented in the literature for the risk-neutral pricing of financial instruments in emission markets. For the structural models proposed, our goals are to derive a forward-backward stochastic differential equation (FBSDE) for the price process of the emissions certificates and solve numerically the associated nonlinear partial differential equations (PDE) for the certificate price and for the prices of financial derivatives in the emissions market. The generalizations/modifications of the structural model which we will study are of the following type: (i) Consider more general forms for the electricity demand process; (ii) Consider different functional forms for the bid and emission stacks. In order to solve the PDE’s for pricing, we will propose and study appropriate efficient numerical methods. The project will continue to reinforce the collaboration with the research team at Wuppertal University, Germany, coordinated by Prof. Matthias Ehrhrardt, progressing the previous work with special emphasis on qualification of young academics in an international environment. Special support will be given to the MSc students André Bento and Joaquim Cavalheiro. Complementary funding from the Germany-Portugal Bilateral project PRISEMA - Pricing of Financial Instruments in Emission Markets, can be obtained, if this project (which was submitted to FCT in September of 2021) is approved for funding by FCT/DAAD. |