Modeling Carbon Price Risk in the Egyptian Voluntary Carbon Market Using a proposed Hybrid model of Long Short-Term Memory (LSTM) neural networks with a Geometric Brownian Motion (GBM) Framework

Carbon price prediction precisely is one of the fundamentals in assessing the risks associated with carbon market trading, particularly in emerging markets where regulatory structures, liquidity conditions, and data availability remain underdeveloped. Egypt recently launched Africa’s first voluntary carbon market in 2024. However, the absence of historical domestic price data, evolving regulatory frameworks, on global benchmarks create substantial challenges for investors, insurers, and policymakers. This study proposes a hybrid modelling framework that integrates Long Short-Term Memory (LSTM) neural networks with a Geometric Brownian Motion (GBM) stochastic process to model carbon-credit prices and quantify price risk in the Egyptian voluntary market, where price uncertainty, regulatory transition, and limited data raise significant environmental and financial risks The LSTM component is trained on international carbon-price indices, together with Egyptian macroeconomic, energy, and environmental variables, to learn time-varying drift and volatility. These parameters are subsequently embedded within the GBM layer to generate Monte Carlo simulations This study provides the first empirical framework for modelling carbon price risk in the Egyptian voluntary carbon market and offers practical insights for pricing carbon-linked financial instruments, voluntary carbon bonds, and insurance products. The findings illustrate that the proposed LSTM–GBM hybrid model achieves superior predictive performance compared with GBM and LSTM models. Risk-quantification outputs, including VAR, highlight the model’s ability to capture the volatility associated with early-stage voluntary carbon markets. In addition, the findings support evidence-based decision-making for FRA, EGX, project developers, and financial institutions engaged in Egypt’s emerging climate-finance ecosystem aligned with Egypt’s 2050 National Climate Strategy.