Quantitative modelling of energy risk

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The aim of the proposed research programme is to develop tools - mathematical models and computational techniques - for energy risk management.Energy is vital to our existence and modern way of life. The efficient production and use of energy, the development of new energy sources, and responsible management of the resources available to us now are critical for our future. These objectives are impossible without properly functioning markets, sending signals about the costs and scarcity of various commodities and other resources to both end users and producers.Energy commodity and environmental markets differ in fundamental ways from markets for other asset classes. In recent years, this difference has made them attractive to institutional and retail investors seeking diversification, but it also means that these markets pose major challenges for mathematical finance and quantitative risk management. This research aims to help to meet some of those challenges by developing models that are able to capture the nature of the uncertainty and risk that arises from the types of extreme movements and correlations we see in energy markets, using polynomial maps of polynomial processes to represent prices. The class of polynomial processes is already rich, but the combination with polynomial maps greatly enriches the range of dynamics that such models can produce. At the same time, this combination ensures that futures prices can always be computed extremely easily. The ability to combine such dynamic richness with mathematical tractability opens up many potential applications in energy risk management; this research programme aims to unlock that potential.