Please use this identifier to cite or link to this item: https://doi.org/10.1080/15326349.2011.542726
Title: Jump-diffusion modeling in emission markets
Authors: Borovkov, K.
Decrouez, G.
Hinz, J. 
Keywords: Environmental finance
Jump-diffusion models
Market equilibrium
Risk-neutral pricing
Stochastic modeling for emission trading
Issue Date: Jan-2011
Citation: Borovkov, K., Decrouez, G., Hinz, J. (2011-01). Jump-diffusion modeling in emission markets. Stochastic Models 27 (1) : 50-76. ScholarBank@NUS Repository. https://doi.org/10.1080/15326349.2011.542726
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. Copyright © Taylor & Francis Group, LLC.
Source Title: Stochastic Models
URI: http://scholarbank.nus.edu.sg/handle/10635/103459
ISSN: 15326349
DOI: 10.1080/15326349.2011.542726
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