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Electricity Contracts Portfolio Selection Based on the Optimization of the Omega Measurement

Author

Listed:
  • Leonardo Lima Gomes

    (PUC-Rio)

  • Luiz Eduardo Brandão

    (IAG PUC-RIO)

  • Antonio Carlos Figueiredo Pinto

    (IAG PUC-RIO)

Abstract

The Brazilian electric power industry has been undergoing significant structural changes, including the creation of a free market for electricity. To obtain above average margins, some firms attempt to increase profits by entering into uncovered trading positions, where the long term price is locked in on one side, while on the other side the firm is subject to variations in the short term spot price. In this article we consider the case of an electricity trading company that takes long and short positions in electricity. A model is proposed for the analysis and decision of the best electricity portfolio, based on the optimization of the Omega measure, subjected to Value at Risk - VaR restrictions. In order to adopt the Omega measure the short term prices are simulated. The results indicate that the portfolio decision is a composition between uncovered buy and seasonal buy with flat sell.(Full article available in Portuguese only)

Suggested Citation

  • Leonardo Lima Gomes & Luiz Eduardo Brandão & Antonio Carlos Figueiredo Pinto, 2010. "Electricity Contracts Portfolio Selection Based on the Optimization of the Omega Measurement," Brazilian Review of Finance, Brazilian Society of Finance, vol. 8(1), pages 45-67.
    • Handle: RePEc:brf:journl:v:8:y:2010:i:1:p:45-67
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    More about this item

    Keywords

    portfolio selection; electricity; omega measure; simulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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