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Dynamic Stochastic Factors, Risk Management and the Energy Futures

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  • Zi-Yi Guo
  • Yangxiaoteng Luo

Abstract

The world crude oil prices have dropped dramatically, and consequently the oil market has become very volatile and risky in the last several years. Since energy markets play very important roles in the international economy and have led several global economic crises, risk management of energy products prices becomes very important for both academicians and market participants. Schwartz and Smith’s model (2000) is applied to calculate risk measures of Brent oil futures contracts and light sweet crude oil (WTI) futures contracts. The model includes a long-term factor and a short-term factor. We show that the two factors explain the Samuelson effect well and the model present well goodness of fit. Our back testing results demonstrate that the models provide satisfactory risk measures for listed crude oil futures contracts.

Suggested Citation

  • Zi-Yi Guo & Yangxiaoteng Luo, 2017. "Dynamic Stochastic Factors, Risk Management and the Energy Futures," International Business Research, Canadian Center of Science and Education, vol. 10(9), pages 50-59, September.
    • Handle: RePEc:ibn:ibrjnl:v:10:y:2017:i:9:p:50-59
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    References listed on IDEAS

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    1. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
    2. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    3. Carsten Sørensen, 2002. "Modeling seasonality in agricultural commodity futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(5), pages 393-426, May.
    4. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    5. David Cabedo, J. & Moya, Ismael, 2003. "Estimating oil price 'Value at Risk' using the historical simulation approach," Energy Economics, Elsevier, vol. 25(3), pages 239-253, May.
    6. Cortazar, Gonzalo & Schwartz, Eduardo S., 2003. "Implementing a stochastic model for oil futures prices," Energy Economics, Elsevier, vol. 25(3), pages 215-238, May.
    7. Youssef, Manel & Belkacem, Lotfi & Mokni, Khaled, 2015. "Value-at-Risk estimation of energy commodities: A long-memory GARCH–EVT approach," Energy Economics, Elsevier, vol. 51(C), pages 99-110.
    8. Pirrong,Craig, 2012. "Commodity Price Dynamics," Cambridge Books, Cambridge University Press, number 9780521195898, November.
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    Cited by:

    1. Simone Kruse & Thomas Tischer & Timo Wittig, 2017. "A New Empirical Investigation Of The Platinum Spot Returns," Journal of Smart Economic Growth, , vol. 2(2), pages 141-148, September.

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    More about this item

    Keywords

    factor model; value-at-risk; exceedances;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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