A Forward-backward Sdes Approach To Pricing In Carbon Markets (mathematics Of Planet Earth)
by Jean-François Chassagneux /
2017 / English / PDF
3.1 MB Download
In Mathematical Finance, the authors consider a mathematical
model for the pricing of emissions permits. The model has
particular applicability to the European Union Emissions Trading
System (EU ETS) but could also be used to consider the modeling
of other cap-and-trade schemes. As a response to the risk of
Climate Change, carbon markets are currently being implemented in
regions worldwide and already represent more than $30 billion.
However, scientific, and particularly mathematical, studies of
these carbon markets are needed in order to expose their
advantages and shortcomings, as well as allow their most
efficient implementation.
In Mathematical Finance, the authors consider a mathematical
model for the pricing of emissions permits. The model has
particular applicability to the European Union Emissions Trading
System (EU ETS) but could also be used to consider the modeling
of other cap-and-trade schemes. As a response to the risk of
Climate Change, carbon markets are currently being implemented in
regions worldwide and already represent more than $30 billion.
However, scientific, and particularly mathematical, studies of
these carbon markets are needed in order to expose their
advantages and shortcomings, as well as allow their most
efficient implementation.
This Brief reviews mathematical properties such as the existence
and uniqueness of solutions for the pricing problem, stability of
solutions and their behavior. These fit into the theory of fully
coupled forward-backward stochastic differential equations
(FBSDEs) with irregular coefficients. The authors present a
numerical algorithm to compute the solution to these non-standard
FBSDEs. They also carry out a case study of the UK energy market.
This involves estimating the parameters to be used in the model
using historical data and then solving a pricing problem using
the aforementioned numerical algorithm.
This Brief reviews mathematical properties such as the existence
and uniqueness of solutions for the pricing problem, stability of
solutions and their behavior. These fit into the theory of fully
coupled forward-backward stochastic differential equations
(FBSDEs) with irregular coefficients. The authors present a
numerical algorithm to compute the solution to these non-standard
FBSDEs. They also carry out a case study of the UK energy market.
This involves estimating the parameters to be used in the model
using historical data and then solving a pricing problem using
the aforementioned numerical algorithm.
The Brief is of interest to researchers in stochastic processes
and their applications, and environmental and energy economics.
Most sections are also accessible to practitioners in the energy
sector and climate change policy-makers.
The Brief is of interest to researchers in stochastic processes
and their applications, and environmental and energy economics.
Most sections are also accessible to practitioners in the energy
sector and climate change policy-makers.
