Research projects

Project CEMAPRE internal

TitlePricing of Financial Instruments in Emission Markets - PRISEMA
ParticipantsJoão M D'Água, Maria do Rosário Grossinho, Manuel Guerra, João Guerra (Principal Investigator), João Janela, Vasco C Tavares
SummaryThe aim of this project is to propose stochastic structural models for the risk-neutral pricing of
carbon emission certificates and develop numerical methods for pricing financial instruments in
emission markets. More precisely, for the different structural models proposed, the main goals are
to obtain the corresponding forward-backward stochastic differential equations (FBSDE) for the price
process of the certificates and to solve numerically the associated PDE's for the certificate price
and for the prices of financial derivatives in the emissions market. In this framework, the
structural model for emission certificates depends on a stochastic process modelling the electricity
demand and the emission certificates are considered as financial derivatives depending on the demand
process and the emissions process.

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 Vasco Tavares and João D'Água. 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 2022) is
approved for funding by FCT/DAAD.