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Mean-variance portfolio methods for energy policy risk management

Author

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  • Gustavo A. Marrero

    (Department of Economics, Universidad de La Laguna, Tenerife, Spain)

  • Luis A. Puch

    () (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa) (Department of Foundations of Economic Analysis II (Quantitative Economics)), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid))

  • Francisco J. Ramos-Real

    (Department of Economics, Universidad de La Laguna, Tenerife, Spain)

Abstract

The risks associated with current and prospective costs of different energy technologies are crucial in assessing the efficiency of the energy mix. However, energy policy typically relies on the evolution of average costs, neglecting the covariances in the costs of the different energy technologies in the mix. Mean-Variance Portfolio Theory is implemented to evaluate jointly the average costs and the associated volatility of alternative energy combinations. In addition systematic and non-systematic risks associated with the energy technologies are computed based on a Capital Asset Pricing Model and considering time varying betas. It is shown that both electricity generation and fuel use imply risks that are idiosyncratic and with relevant implications for energy and environmental policy.

Suggested Citation

  • Gustavo A. Marrero & Luis A. Puch & Francisco J. Ramos-Real, 2013. "Mean-variance portfolio methods for energy policy risk management," Documentos de Trabajo del ICAE 2013-41, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  • Handle: RePEc:ucm:doicae:1341
    Note: We would like to thank the Guest Editors, Shawkat Hammoudeh and Michael McAleer, the Editor, Hamid Beladi, and a referee for thoughtful comments and suggestions. We also thank Ricardo Guerrero, José Manuel Martínez-Duart and Alfonso Novales for their very helpful comments. Corresponding author: Luis A. Puch, Dto. Economía Cuantitativa, Universidad Complutense de Madrid, 28223 Somosaguas, Madrid, Spain. lpuch@ccee.ucm.es
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    Cited by:

    1. Hammoudeh, Shawkat & McAleer, Michael, 2015. "Advances in financial risk management and economic policy uncertainty: An overview," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 1-7.
    2. Hughes, Larry & de Jong, Moniek & Wang, Xiao Qin, 2016. "A generic method for analyzing the risks to energy systems," Applied Energy, Elsevier, vol. 180(C), pages 895-908.
    3. Gökgöz, Fazıl & Atmaca, Mete Emin, 2017. "Portfolio optimization under lower partial moments in emerging electricity markets: Evidence from Turkey," Renewable and Sustainable Energy Reviews, Elsevier, vol. 67(C), pages 437-449.
    4. Nie, S. & Li, Y.P. & Liu, J. & Huang, Charley Z., 2017. "Risk management of energy system for identifying optimal power mix with financial-cost minimization and environmental-impact mitigation under uncertainty," Energy Economics, Elsevier, vol. 61(C), pages 313-329.
    5. Gustavo A. Marrero & Yannick Perez & Marc Petit & Francisco Javier Ramos-Real, 2015. "Electric vehicle fleet contributions for isolated systems. The case of the Canary Islands," International Journal of Automotive Technology and Management, Inderscience Enterprises Ltd, vol. 15(2), pages 171-193.
    6. repec:eee:rensus:v:77:y:2017:i:c:p:636-651 is not listed on IDEAS
    7. repec:eee:eneeco:v:64:y:2017:i:c:p:158-169 is not listed on IDEAS

    More about this item

    Keywords

    Mean-variance; CAPM model; Energy risks; Energy mix; Energy policy.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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