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Revisiting value-at-risk and expected shortfall in oil markets under structural breaks: The role of fat-tailed distributions

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  • Patra, Saswat

Abstract

Modeling the volatility of oil prices is extremely crucial from a risk management perspective. Value-at-risk (VaR) and Expected Shortfall (ES), the two most popular measures of risk in financial markets, are dependent on the volatility of the oil prices. In this study, Pearson Type-IV and Johnsons Su distributions are explored as two alternate distributions with characteristics, such as asymmetry and heavy tail, to model the volatility and forecast VaR/ES. The estimation is carried out under endogenously determined structural breaks from the data. Various Backtesting methodologies are employed to test the efficacy of the forecasts. The empirical results obtained show that the models with Pearson's Type-IV and Johnson's Su distributions outperform other fat-tailed distributions and the normal distribution especially at the 1% (for long positions) and 99% (for short positions) level. This has policy implications for the oil producing companies, market participants, regulators in the energy sector and the government in general.

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  • Patra, Saswat, 2021. "Revisiting value-at-risk and expected shortfall in oil markets under structural breaks: The role of fat-tailed distributions," Energy Economics, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:eneeco:v:101:y:2021:i:c:s0140988321003406
    DOI: 10.1016/j.eneco.2021.105452
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    7. Tanin, Tauhidul Islam & Hasanov, Akram Shavkatovich & Shaiban, Mohammed Sharaf Mohsen & Brooks, Robert, 2022. "Risk transmission from the oil market to Islamic and conventional banks in oil-exporting and oil-importing countries," Energy Economics, Elsevier, vol. 115(C).
    8. Zhao, Lu-Tao & Wang, Dai-Song & Ren, Zhong-Yuan, 2024. "The impact of joint events on oil price volatility: Evidence from a dynamic graphical news analysis model," Economic Modelling, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    Volatility; Value-at-risk; Expected shortfall; Pearson type IV; Johnson Su distribution; Crude oil market;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • 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

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