Cross-Commodity Analysis and Applications to Risk Management

Journal of Futures Markets, Vol. 29, No. 3, January 2009

20 Pages Posted: 18 Apr 2007 Last revised: 16 Nov 2009

See all articles by Reik H. Boerger

Reik H. Boerger

RWE AG

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science

Gero Schindlmayr

affiliation not provided to SSRN

Date Written: December 1, 2007

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.

Keywords: Commodity, Hedging, Risk Management, Power Plant

JEL Classification: C1, C2, C4, G11

Suggested Citation

Boerger, Reik H. and Cartea, Álvaro and Kiesel, Ruediger and Schindlmayr, Gero, Cross-Commodity Analysis and Applications to Risk Management (December 1, 2007). Journal of Futures Markets, Vol. 29, No. 3, January 2009. Available at SSRN: https://ssrn.com/abstract=981127

Reik H. Boerger

RWE AG ( email )

Essen, DE
Germany

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science ( email )

Essen, 45117
Germany

HOME PAGE: http://www.lef.wiwi.uni-due.de/

Gero Schindlmayr

affiliation not provided to SSRN ( email )

No Address Available

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