Jump-diffusion modeling in emission markets

DOI10.1080/15326349.2011.542726zbMATH Open1260.91170arXiv1001.3728OpenAlexW2100430060MaRDI QIDQ4906407FDOQ4906407

Authors: G. Decrouez, Juri Hinz, K. Borovkov 

Publication date: 11 February 2013

Published in: Stochastic Models (Search for Journal in Brave)

Abstract: Mandatory emission trading schemes are being established around the world. Participants of such market schemes are always exposed to risks. This leads to the creation of an accompanying market for emission-linked derivatives. To evaluate the fair prices of such financial products, one needs appropriate models for the evolution of the underlying assets, emission allowance certificates. In this paper, we discuss continuous time diffusion and jump-diffusion models, the latter enabling one to model information shocks that cause jumps in allowance prices. We show that the resulting martingale dynamics can be described in terms of non-linear partial differential and integro-differential equations and use a finite difference method to investigate numerical properties of their discretizations. The results are illustrated by a small numerical study.

Full work available at URL: https://arxiv.org/abs/1001.3728

Recommendations

• Modeling and Computation of CO₂Allowance Derivatives Under Jump-Diffusion Processes
• Risk-neutral models for emission allowance prices and option values
• The endogenous price dynamics of emission allowances and an application to CO\(_2\) option pricing
• PRICING AND HEDGING IN CARBON EMISSIONS MARKETS

Mathematics Subject Classification ID

Environmental economics (natural resource models, harvesting, pollution, etc.) (91B76) Corporate finance (dividends, real options, etc.) (91G50) Stochastic models in economics (91B70) Optimal stochastic control (93E20) Trade models (91B60)

Cites Work

• Financial Modelling with Jump Processes
• Title not available (Why is that?)
• Market design for emission trading schemes
• Jump-diffusion processes: volatility smile fitting and numerical methods for option pricing
• A Finite Difference Scheme for Option Pricing in Jump Diffusion and Exponential Lévy Models
• Title not available (Why is that?)
• Convergence of numerical schemes for viscosity solutions to integro-differential degenerate parabolic problems arising in financial theory
• Optimal stochastic control and carbon price formation
• A model of intertemporal emission trading, banking, and borrowing
• Risk-neutral models for emission allowance prices and option values
• Title not available (Why is that?)
• PRICING AND HEDGING IN CARBON EMISSIONS MARKETS
• Environmental economics and modeling marketable permits
• A dynamic analysis of the marketable permits approach to global warming policy: A comparison of spatial and temporal flexibility
• On fair pricing of emission-related derivatives

Cited In (7)

• Modeling and Computation of CO₂Allowance Derivatives Under Jump-Diffusion Processes
• Optimal Investment Timing for Carbon Emission Reduction Technology with a Jump-Diffusion Process
• Risk Aversion in Modeling of Cap-and-Trade Mechanism and Optimal Design of Emission Markets
• A Forward-Backward SDEs Approach to Pricing in Carbon Markets
• A multi-period stochastic portfolio optimization model applied for an airline company in the EU ETS
• Detecting and modelling the jump risk of \(\text{CO}_2\) emission allowances and their impact on the valuation of option on futures contracts
• Estimation of Lévy-driven Ornstein-Uhlenbeck processes: application to modeling of \(\mathrm{CO}_2\) and fuel-switching

This page was built for publication: Jump-diffusion modeling in emission markets

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4906407)