Cross-commodity analysis and applications to risk management
AbstractThe understanding of joint asset return distributions is an important ingredient for managing risks of portfolios. Although this is a well-discussed issue in fixed income and equity markets, it is a challenge for energy commodities. In this study we are concerned with describing the joint return distribution of energy-related commodities futures, namely power, oil, gas, coal, and carbon. The objective of the study is threefold. First, we conduct a careful analysis of empirical returns and show how the class of multivariate generalized hyperbolic distributions performs in this context. Second, we present how risk measures can be computed for commodity portfolios based on generalized hyperbolic assumptions. And finally,we discuss the implications of our findings for risk management analyzing the exposure of power plants, which represent typical energy portfolios. Our main findings are that risk estimates based on a normal distribution in the context of energy commodities can be statistically improved using generalized hyperbolic distributions. Those distributions are flexible enough to incorporate many characteristics of commodity returns and yield more accurate risk estimates. Our analysis of the market suggests that carbon allowances can be a helpful tool for controlling the risk exposure of a typical energy portfolio representing a power plant
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/12155.
Length: 219 p.
Date of creation: Mar 2009
Date of revision:
Publication status: Published in The Journal of Futures Markets (2009-03) v.v. 29, p.197-217
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Web page: http://www.uc3m.es
Other versions of this item:
- Börger, Reik & Cartea, Álvaro & Kiesel, Rüdiger & Schindlmayr, Gero, . "Cross-Commodity Analysis and Applications to Risk management," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/12080, Universidad Carlos III de Madrid.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cartea, Álvaro & Figueroa, Marcelo G., 2005.
"Pricing in electricity markets : a mean reverting jump diffusion model with seasonality,"
Open Access publications from Universidad Carlos III de Madrid
info:hdl:10016/12199, Universidad Carlos III de Madrid.
- Alvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor and Francis Journals, vol. 12(4), pages 313-335.
- Alvaro Cartea & Marcelo_Gustavo Figueroa, 2005. "Pricing in Electricity Markets: a Mean Reverting Jump Diffusion Model with Seasonality," Finance 0501011, EconWPA, revised 10 Sep 2005.
- Alvaro Cartea & Marcelo Gustavo Figueroa, 2005. "Pricing in Electricity Markets: a Mean Reverting Jump Diffusion Model with Seasonality," Birkbeck Working Papers in Economics and Finance 0507, Birkbeck, Department of Economics, Mathematics & Statistics.
- Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
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