The Systemic Risk of Energy Markets

40 Pages Posted: 7 Apr 2013

See all articles by Diane Pierret

Diane Pierret

Universite du Luxembourg - Luxembourg School of Finance

Date Written: February 13, 2013

Abstract

This paper investigates the meaning of systemic risk in energy markets and proposes a methodology to measure it. Energy Systemic Risk is defined by the risk of an energy crisis raising the prices of all energy commodities with negative consequences for the real economy. Measures of the total cost (EnSysRISK) and the net impact (Delta MES) of an energy crisis on the rest of the economy are proposed. The measures are derived from the Marginal Expected Shortfall (MES) capturing the tail dependence between the asset and the energy market factor. The adapted MES accounts for causality and dynamic exposure to common latent factors. The methodology is applied to the European Energy Exchange and the DAX industrial index, where a minor decline in industrial productivity is observed from recent energy shocks.

Keywords: energy crisis, factor models, marginal expected shortfall, market integration

JEL Classification: C32, C58, Q43

Suggested Citation

Pierret, Diane, The Systemic Risk of Energy Markets (February 13, 2013). Available at SSRN: https://ssrn.com/abstract=2245811 or http://dx.doi.org/10.2139/ssrn.2245811

Diane Pierret (Contact Author)

Universite du Luxembourg - Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511
Luxembourg

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