Connecting math and finance to energy market

Buying and selling electricity on the energy market brings its own set of exotic questions. Electricity is intangible – you cannot store it, like corn or oil, and predicting its future price demands complicated new models.

Recently Dr. Emad Imreizeeq tackled this tricky problem of modeling the future price of electricity and gas to receive his PhD in Applied Mathematics. ‘Basically, I started by looking at the futures data,’ explain the 42-year-old, ‘and then I included perturbation terms to create a new variation of an already existent model. This newer model gives a more realistic picture of the energy futures market.’

Perturbation terms are used in numerical analysis to ‘perturb’ a simplified problem and solution in order to come closer to the real conditions of the problem. ‘For example, you have to consider bid-ask spreads and uncertainties in correlations between futures with different times to maturity.’ Imreizeeq identified the parameters of his model and then used real data from the European energy market to test it.

‘The model is a perfect example of ‘high technology with a human touch’,’ lauded Dr. Arunabha Bagchi, Chair in Stochastic Systems and Signals. ‘It combines a high level of engineering and math with social science and finance. The energy market is now really about finance.’ And Imreizeeq has managed to develop a mathematically consistent model which can be used for pricing energy derivatives in the future.’

Imreizeeq hopes to find a position in academia or an energy-related industry. With Arabic as his native language, he is especially looking in the oil-rich nations of the Middle East. Meanwhile, his colleague Dr. Jaroslav Krystul, Assistant Professor in Financial Engineering, is ready to build on Imreizeeq’s research. ‘The carbon trading market is the next big thing to work on,’ said Krystul. ‘There is no perfect model, but you need to synthesize as many factors as possible.’

Carbon emission quotas are gradually being exchanged on the carbon market. For example, your company might use wind turbines to produce energy, which allows you to receive higher quotas of carbon than someone who uses coal. You can then sell your carbon quotas to the producer of coal-based energy, with the idea that this financial gain will help you invest in more wind turbines. In this way, the market can encourage more renewable energy.

Selling carbon quotas is similar to when you agree to finance the planting of trees in the rain forest to offset your plane travel. ‘Every energy source has its pros and cons,’ said Imreizeeq. ‘For example, nuclear energy is carbon free. But as we recently saw in Japan, when there was a nuclear catastrophe, it made the issue of carbon emissions insignificant.’

Imreizeeq is married with two children and has worked and studied at the UT since 1998. He received his Masters in Engineering Mathematics in 2000 and, while working as a Research Assistant in Applied Mathematics, conducted research in financial engineering. He also was a lecturer for the Department of Finance and Accounting for two years and supervised the final projects of more than fifteen master’s students.

While Imreizeeq, Bagchi and Krystul develop the complex synthesis of mathematical techniques into working financial and energy models, they are quite a synthesis of cultures and nationalities themselves. Imreizeeq was born in East Jerusalem of Palestinian descent. Bagchi was born in Calcutta, India, and spent many years in the USA. Krystul was born in what is now Lithuania and is of Polish descent and a Russian native speaker. In total, they represent seven different cultural experiences brought together at the UT into a working human model of high tech with a human touch!

Catherine Ann Lombard


Imreizeeq, left, Bagchi, and Krystul are applying mathematical models to the energy derivative market. Photo: Gijs van Ouwerkerk