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    A multivariate commodity analysis and applications to risk management

    Borger, R.H. and Cartea, Alvaro and Schindlmayr, G. (2007) A multivariate commodity analysis and applications to risk management. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    The understanding of joint asset return distributions is an important ingredient for managing risks of portfolios. While this is a well-discussed issue in fixed income and equity markets, it is a challenge for energy commodities. In this paper we are concerned with describing the joint return distribution of energy related commodities futures, namely power, oil, gas, coal and carbon. The objective of the paper is threefold. First, we conduct a careful analysis of empirical returns and show how the class of multivariate generalized hyperbolic distributions performs in this context. Second, we present how risk measures can be computed for commodity portfolios based on generalized hyperbolic assumptions. And finally, we discuss the implications of our findings for risk management analyzing the exposure of power plants which represent typical energy portfolios. Our main findings are that risk estimates based on a normal distribution in the context of energy commodities can be statistically improved using generalized hyperbolic distributions. Those distributions are flexible enough to incorporate many characteristics of commodity returns and yield more accurate risk estimates. Our analysis of the market suggests that carbon allowances can be a helpful tool for controlling the risk exposure of a typical energy portfolio representing a power plant.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0709
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 26 Mar 2019 15:46
    Last Modified: 30 Jul 2019 17:14
    URI: http://eprints.bbk.ac.uk/id/eprint/26911

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