engleski

Similarities between Expected Shortfall and Value at Risk: Application to Energy Markets

We look at the compatibility and interaction between the well established Value at risk (VaR) measure and its “coherent” sibling Expected shortfall (ES). Although theoretically a superior risk measure ES is not accepted by the regulators for the purpose of calculating economic capital. Furthermore, the concept of ES is lagging behind VaR when it comes to empirical research, model comparison and backtesting methodology. VaR and ES are connected in the sense that from the VaR surface we can easily calculate ES. We test the performance of a range of VaR and ES models on energy commodities, WTI oil, natural gas and coal, at high confidence levels (95, 99 and 99.5%) during the ongoing economic crisis. Out of the analysed commodities natural gas is the most volatile and most prone to extreme movements. For the major part due to its domestic consumption coal proved to be the least volatile commodity with the lowest probability of extreme events. The obtained results show consistency in that the best performing VaR models are almost identical to the best performing ES models.

Energy markets ; Expected shortfall ; Value at Risk ; Extreme value theory

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