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Time-consistency in managing a commodity portfolio: a dynamic risk measure approach

Geman, Hélyette and Ohana, S. (2008) Time-consistency in managing a commodity portfolio: a dynamic risk measure approach. Journal of Banking & Finance 32 (10), pp. 1991-2005. ISSN 0378-4266.

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Official URL: http://dx.doi.org/10.1016/j.jbankfin.2007.05.020

Abstract

We address the problem of managing a storable commodity portfolio, that includes physical assets and positions in spot and forward markets. The vast amount of capital involved in the acquisition of a power plant or storage facility implies that the financing period stretches over a period of several quarters or years. Hence, an intertemporally consistent way of optimizing the portfolio over the planning horizon is required. We demonstrate the temporal inconsistency of static risk objectives based on final wealth and advocate the validity in our setting of a new class of recursive risk measures introduced by Epstein and Zin [Epstein, G., Zin, S., 1989. Substitution, risk aversion, and the temporal behavior of consumption and asset returns: A theoretical framework. Econometrica, 57 (4) 937–969] and Wang [Wang, T., 2000. A class of dynamic risk measures University of British Columbia]. These risk measures provide important insights on the trade-offs between date-specific risks (i.e., losses occurring at a point in time) and time-duration risks represented by the pair (return, risk) over a planning horizon; in a number of situations, they dramatically improve the efficiency of static risk objectives, as exhibited in numerical examples.

Item Type: Article
Keyword(s) / Subject(s): Commodity portfolio, dynamic risk measures, time-consistency, temporal elasticity of substitution
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 01 Feb 2011 09:44
Last Modified: 17 Apr 2013 12:18
URI: http://eprints.bbk.ac.uk/id/eprint/1948

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