Modeling and valuation of financial instruments for climate and energy risk mitigation

We will contribute to the modeling of climate and energy derivatives, two kinds of instruments that are crucial in the management of the energy transition and climate change. As noticed by Sendeniz-Yüncü et al. (2018), derivatives, if they are well-functioning, can foster economic growth by allowing firms to share risks efficiently and start new projects even though they bring some risk. Even though several economic subjects use them for generating profits, climate and weather derivatives can also reduce losses due to adverse movements in energy prices and climate changes. Due to the complex nature of the variables involved, the diverse research skills of the three Units are fundamental for the project, which pursues the following two main objectives: the definition and validation of new models for the dynamics of energy prices and weather-related variables and the development of efficient numerical methods and algorithms to value derivatives under the novel model specifications. The introduction of more realistic models would allow for a better assessment of future scenarios and more effective risk management and would yield a reliable and efficient valuation of energy and weather derivatives, making their market more efficient and transparent. In particular, we will develop suitable Deep Neural Network algorithms to forecast energy prices and weather-related variables.