Value-at-risk methodologies for effective energy portfolio risk management

Abstract

Research has shown that the prediction of future variance through advanced GARCH type models is essential for an effective energy portfolio risk management. Still there has been a failure to provide a clear view on the specific amount of capital that is at risk on behalf of the investor or any party directly affected by the price fluctuations of specific or multiple energy commodities. Thus, it is necessary for risk managers to make one further step, determining the most robust and effective approach that will enable them to precisely monitor and accurately estimate the portfolio's value-at-risk (VaR) which by definition, provides a good measure of the total actual amount at stake. Nevertheless, despite the variety of the variance models that have been developed and the range of various methodologies, most researchers have concluded that there is no model or specific methodology that outperforms all others. We find the best approach to minimize risk and accurately forecast the future potential losses is to adopt a methodology which takes into consideration the particular features which characterize the trade of energy products. © 2019 Economic Society of Australia, Queensland