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Effective energy commodity risk management: Econometric modeling of price volatility

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  • Halkos, George E.
  • Tsirivis, Apostolos S.

Abstract

The current study emphasizes on the importance of developing an effective price risk management strategy for investment portfolios containing energy assets, given the high volatility of this market. A thorough investigation of energy price volatility is provided through the use of GARCH type model variations and the Markov-Switching GARCH methodology, as these are used in the most representative academic research. First, a large number of GARCH type models are exhibited together with all the econometric procedures and tests that are necessary for developing a robust and precise forecasting model for measuring energy price volatility. Next, follows a comprehensive examination of the probability of potential shifts in the unconditional variance of the models due to the effect of economic crises and several unexpected geopolitical events. Finally, taking into consideration the most relevant and up-to-date of the academic literature, a detailed comparison of the various volatility models and methodologies is presented. This is based on a variety of data samples containing the price returns of the main commercial energy commodities.

Suggested Citation

  • Halkos, George E. & Tsirivis, Apostolos S., 2019. "Effective energy commodity risk management: Econometric modeling of price volatility," Economic Analysis and Policy, Elsevier, vol. 63(C), pages 234-250.
  • Handle: RePEc:eee:ecanpo:v:63:y:2019:i:c:p:234-250
    DOI: 10.1016/j.eap.2019.06.001
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    Cited by:

    1. George E. Halkos & Apostolos S. Tsirivis, 2019. "Energy Commodities: A Review of Optimal Hedging Strategies," Energies, MDPI, Open Access Journal, vol. 12(20), pages 1-19, October.

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    More about this item

    Keywords

    Energy commodities; WTI oil; Brent oil; Electricity; Natural gas; Gasoline; Risk management; Volatility modeling; ARCH–GARCH models; Markov-Switching GARCH models;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G3 - Financial Economics - - Corporate Finance and Governance
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P28 - Economic Systems - - Socialist Systems and Transition Economies - - - Natural Resources; Environment
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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