Tail Risk in Energy Portfolios

38 Pages Posted: 15 Jan 2013 Last revised: 2 Aug 2014

See all articles by Carlos G. Pedraz

Carlos G. Pedraz

Banco de España

Manuel Moreno

University of Castilla-La Mancha

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: March 3, 2014


This article analyzes the tail behavior of energy price risk using a multivariate approach, in which the exposure to energy markets is given by a portfolio of oil, gas, coal, and electricity. To accommodate various dependence and tail decay patterns, this study models energy returns using different generalized hyperbolic conditional distributions and time-varying conditional mean and covariance.

Employing daily energy futures data from August 2005 to March 2012, the authors recursively estimate the models and evaluate tail risk measures for the portfolio's profit-and-loss distribution for long and short positions at various horizons and confidence levels. Both in-sample and out-of-sample analysis applied to different energy portfolios show the importance of heavy tails and positive asymmetry in the distribution of energy risk factors. Thus, tail risk measures for energy portfolios based on standard methods (e.g. normality, constant covariance matrix) and on models with exponential tail decay underestimate actual tail risk, especially for short positions and short time horizons.

Keywords: Asymmetric DCC, multivariate generalized hyperbolic distributions, tail risk, skewness, risk measure backtests

JEL Classification: C46, G11, Q41

Suggested Citation

G. Pedraz, Carlos and Moreno Fuentes, Manuel and Peña, Juan Ignacio, Tail Risk in Energy Portfolios (March 3, 2014). Energy Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2200407 or http://dx.doi.org/10.2139/ssrn.2200407

Carlos G. Pedraz (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014

Manuel Moreno Fuentes

University of Castilla-La Mancha ( email )

Cobertizo San Pedro Martir s/n
Toledo, Toledo 45071

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

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