PREEM Seminar – From Market Design for Emission Trading Schemes towards Robust Risk Measures
Date: Tuesday 22 March 2011, 12:00 – 13:00.
Joint Seminar: UTS PREEM (QFRC Program for Research in Energy and Emissions Markets) and School of Mathematical Sciences
Title: Optimization at Work: From Market Design for Emission Trading Schemes towards Robust Risk Measures
Speaker: Prof. Dr Hans-Jakob Lüthi, Institute for Operations Research, ETHZ
The focus of this lecture is to apply sound optimization concepts to socially relevant problems. In the first part I will present a recent project on the stochastic price formation of CO2 allowances in a cap and trade system such as the European Union Emission Trading Scheme (joint work with M. Fehr, J. Hinz and R. Carmona). In particular the following questions will be addressed:
• Relation of allowance prices to fundamental price drivers such as stochastic production costs and demand;
• Equilibrium price formation of goods whose manufacturing causes pollution;
• Emergent systems properties such as windfall profits in relation to alternative market design like carbon tax, auctioning of allowances, relative allocation schema, etc;
• Computational tractability and verification of the quality of approximate solutions using abstract LP duality theory.
In the second part we will present an extension of coherent risk measures towards robust risk measures (joint work with A. Fertis, M. Baes). It is well known that abstract duality underlies the representation theorem of coherent and convex risk measures. In this work we suggest to incorporate another source of uncertainty into the concept of risk measures, namely the uncertainty with regard to the estimates of the underlying distribution’s parameters. Immunizing against this source of risk can be done in the spirit of robust optimization motivating, for example, a computationally tractable concept of robust CVaR. Again, the concept is based on abstract duality theory of optimization in topological vector spaces. Preliminary results applied to managing price and volume risk in energy markets will be presented.
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