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Name: Glyn Holton
Affiliation: Contingency Analysis
E-mail: glyn@contingencyanalysis.com
Date: 16 Jul 1997
Time: 10:50:39
When you apply value-at-risk to the energy markets, the theory doesn’t change. For linear portfolios, you will want to use a closed form solution such as delta-normal value-at-risk. If options are involved, simulation – probably Monte Carlo value-at-risk --- will be the way to go. Things to look out for are:
1) You need to be careful in how you model the price forward curve. You have to decide if you want to model it directly or model its components – e.g. forward interest rate curve, cost of carry curve, spot price, etc. In the energy markets, I think the former approach usually works best.
2) Decide how to address seasonality effects which impose a drift on energy prices. If you are modeling value-at-risk with a one month horizon, this is a big issue. For one-day value-at-risk, it is less of an issue.
value-at-risk for energy markets is an emerging issue. A lot of work remains to be done. I am helping one of the trade magazines prepare a big article on the topic for September … so keep an eye out.
Regards,
Glyn
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