A multi-period stochastic portfolio optimization model applied for an airline company in the EU ETS

Date

2014-01-01

Author

Kalayci, E.
Gaygısız Lajunen, Esma
Weber, G. -W.

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This paper aims to set up and solve a multi-period stochastic portfolio optimization model from an airline company's point of view, considering all the specific European Union Emissions Trading Scheme (EU ETS) regulatory, managerial and trading constraints (i.e. physical constraints). Our contribution to existing academic literature is multiple. As the first ever case, we apply this technique to the aviation sector, a newly included sector within the EU ETS. More than mainly incorporating physical and technical ('engineering') features and focusing on short-term planning issues, we particularly address financial features and focus on mid-term planning issues. Therefore, instead of using spot prices, we run Monte Carlo simulations of correlated geometric Brownian motions (GBM) for traded futures prices of various emission allowance types for different CO2 delivery time periods. We thereby specifically refer to the existing exchange-traded emission allowance types EU Emission Allowance (EUA) and Certified Emission Reduction (CER). By implementing actually valid and real-world-oriented regulatory constraints for EU ETS, namely managerial and trading constraints, our model implies a real-life application. We also highlight the possibility of banking and borrowing of emission allowances between CO2 compliance periods, which is a crucial regulatory feature of EU ETS.

Subject Keywords

Multi-stage stochastic portfolio optimization, Correlated geometric Brownian motion, Monte Carlo simulation, EU ETS

URI

https://hdl.handle.net/11511/46748

Journal

OPTIMIZATION

DOI

https://doi.org/10.1080/02331934.2014.895900

Collections

Department of Economics, Article

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Citation Formats

E. Kalayci, E. Gaygısız Lajunen, and G.-W. Weber, “A multi-period stochastic portfolio optimization model applied for an airline company in the EU ETS,” OPTIMIZATION, pp. 1817–1835, 2014, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/46748.