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Essays on Financial Risks and Derivatives with Applications to Electricity Markets and Credit Markets

Green, Rikard LU (2009) In Lund Economic Studies 158.
Abstract (Swedish)
Popular Abstract in Swedish

Kontrakt som handlas på de internationella finans- och råvarumarknaderna är förenade med komplexa riskstrukturer. Denna avhandling behandlar två specifika typer av risk; marknadsrisk och kreditrisk.



Det första kapitlet i avhandlingen undersöker marknadsrisker på den Nordiska elmarknaden. Vi utför in-sample och out-of-sample backtesting av en VaR-modell baserad på GARCH volatilitet med NIG innovationer. Dessutom tillämpar vi Cornish-Fisher expansionen för att erhålla analytiska approximationer av de NIG baserade VaR beräkningarna. Resultaten visar att modellen är ett konkurrenskraftigt alternativ till den välkända Gaussiska GARCH-modellen. Resultaten visar också att... (More)
Popular Abstract in Swedish

Kontrakt som handlas på de internationella finans- och råvarumarknaderna är förenade med komplexa riskstrukturer. Denna avhandling behandlar två specifika typer av risk; marknadsrisk och kreditrisk.



Det första kapitlet i avhandlingen undersöker marknadsrisker på den Nordiska elmarknaden. Vi utför in-sample och out-of-sample backtesting av en VaR-modell baserad på GARCH volatilitet med NIG innovationer. Dessutom tillämpar vi Cornish-Fisher expansionen för att erhålla analytiska approximationer av de NIG baserade VaR beräkningarna. Resultaten visar att modellen är ett konkurrenskraftigt alternativ till den välkända Gaussiska GARCH-modellen. Resultaten visar också att Cornish-Fisher expansionen ger rimliga resultat för de mindre extrema kvantilerna, särskilt när avkastningsfördelningen liknar normalfördelningen.



Det andra kapitlet fortsätter att undersöka marknadsrisker på den Nordiska elmarknaden. Vi föreslår en diffusionsmodell med hopp samt stokastisk volatilitet för att modellera spotpriset på el. Modellen estimeras genom att kombinera gängse statistiska metoder med en Markov Chain Monte Carlo (MCMC) algoritm. Resultaten visar att modellen fångar upp stora delar av de trajektorievisa och statistiska egenskaperna i spotpriset. Därför menar vi att modellen är en kandidat till applikationer inom riskhantering och derivatprissättning.



Det tredje kapitlet behandlar åter marknadsrisker. Vi tillämpar spotprismodellen från kapitel två för att prissätta forwardkurvan på den Nordiska elmarknaden. Vi börjar med att härleda en semi-sluten prissättningsformel för forwardkurvan, och därefter kalibreras denna till marknadsdata. Resultaten visar att modellen överträffar sin benchmark-modell.



Det sista kapitlet i avhandlingen går i riktning mot kreditrisker. Studien expanderar Mertons klassiska modell för prissättning av företagsobligationer under kreditrisk, till en internationell miljö med stokastiska inhemska och utländska räntor. I en omfattande analys som bygger på komparativ statik, studerar vi hur kreditrisken i modellen beror på valutaeffekter samt relaterade variabler. (Less)
Abstract
Contracts traded on international financial and commodity markets are associated with complex risk structures. In this dissertation we are concerned with two specific types of risks; market risks and credit risks.



The first chapter investigates market risks in the context of the Nordic electricity market. The paper performs in- and out-of-sample backtesting of a VaR model based on GARCH volatility with NIG innovations. Furthermore, the Cornish-Fisher expansion is applied to get analytical approximations of the NIG based VaR estimates. Backtesting shows that the model is a promising alternative to the well known Gaussian GARCH. Results also show that the Cornish-Fisher approximation gives reasonable outcomes for the less... (More)
Contracts traded on international financial and commodity markets are associated with complex risk structures. In this dissertation we are concerned with two specific types of risks; market risks and credit risks.



The first chapter investigates market risks in the context of the Nordic electricity market. The paper performs in- and out-of-sample backtesting of a VaR model based on GARCH volatility with NIG innovations. Furthermore, the Cornish-Fisher expansion is applied to get analytical approximations of the NIG based VaR estimates. Backtesting shows that the model is a promising alternative to the well known Gaussian GARCH. Results also show that the Cornish-Fisher approximation gives reasonable outcomes for the less extreme quantiles, especially when the return distribution is close to normality.



The second chapter continues to explore market risks on the Nordic electricity market. A mean-reverting jump diffusion stochastic volatility model for the electricity spot price is suggested. The model is estimated with a combination of standard statistical methods and a Markov Chain Monte Carlo (MCMC) algorithm. Results indicate that the model captures large parts of the trajectorial and statistical properties of the spot price. Hence, the model is a candidate for applications in risk management and derivative pricing.



The third chapter is again concerned with market risks. The spot price model from chapter two is applied to pricing of the forward curve in the Nordic electricity market. A semi-closed solution for the forward curve is derived, and then calibrated to market data. Results show that the model outperforms its benchmark.



The final chapter of the dissertation goes in the direction of credit risks. The paper extends Merton’s classical corporate bond credit risk model to an international setting with stochastic domestic and foreign interest rates. In an extensive comparative static analysis we study how the credit spread in the model depends on the currency and related variables. (Less)
Please use this url to cite or link to this publication:
author
supervisor
opponent
  • Professor Benth, Fred Espen, Department of Mathematics, University of Oslo
organization
publishing date
type
Thesis
publication status
published
subject
keywords
Markov Chain Monte Carlo, Jump Diffusion Process, Stochastic Volatility, VaR, Electricity Markets, Market Risk, Forward Curve, Credit Risk, Currency Effects
in
Lund Economic Studies
volume
158
pages
176 pages
publisher
Department of Economics, Lund Universtiy
defense location
EC3:210, Holger Crafoords Ekonomicentrum, Lund
defense date
2009-10-09 13:15
ISSN
0460-0029
language
English
LU publication?
yes
id
12de5a8c-b08b-46ea-9be9-6870a9d605cc (old id 1472113)
date added to LUP
2009-09-09 13:48:14
date last changed
2016-09-19 08:44:49
@phdthesis{12de5a8c-b08b-46ea-9be9-6870a9d605cc,
  abstract     = {Contracts traded on international financial and commodity markets are associated with complex risk structures. In this dissertation we are concerned with two specific types of risks; market risks and credit risks. <br/><br>
<br/><br>
The first chapter investigates market risks in the context of the Nordic electricity market. The paper performs in- and out-of-sample backtesting of a VaR model based on GARCH volatility with NIG innovations. Furthermore, the Cornish-Fisher expansion is applied to get analytical approximations of the NIG based VaR estimates. Backtesting shows that the model is a promising alternative to the well known Gaussian GARCH. Results also show that the Cornish-Fisher approximation gives reasonable outcomes for the less extreme quantiles, especially when the return distribution is close to normality. <br/><br>
<br/><br>
The second chapter continues to explore market risks on the Nordic electricity market. A mean-reverting jump diffusion stochastic volatility model for the electricity spot price is suggested. The model is estimated with a combination of standard statistical methods and a Markov Chain Monte Carlo (MCMC) algorithm. Results indicate that the model captures large parts of the trajectorial and statistical properties of the spot price. Hence, the model is a candidate for applications in risk management and derivative pricing. <br/><br>
<br/><br>
The third chapter is again concerned with market risks. The spot price model from chapter two is applied to pricing of the forward curve in the Nordic electricity market. A semi-closed solution for the forward curve is derived, and then calibrated to market data. Results show that the model outperforms its benchmark. <br/><br>
<br/><br>
The final chapter of the dissertation goes in the direction of credit risks. The paper extends Merton’s classical corporate bond credit risk model to an international setting with stochastic domestic and foreign interest rates. In an extensive comparative static analysis we study how the credit spread in the model depends on the currency and related variables.},
  author       = {Green, Rikard},
  issn         = {0460-0029},
  keyword      = {Markov Chain Monte Carlo,Jump Diffusion Process,Stochastic Volatility,VaR,Electricity Markets,Market Risk,Forward Curve,Credit Risk,Currency Effects},
  language     = {eng},
  pages        = {176},
  publisher    = {Department of Economics, Lund Universtiy},
  school       = {Lund University},
  series       = {Lund Economic Studies},
  title        = {Essays on Financial Risks and Derivatives with Applications to Electricity Markets and Credit Markets},
  volume       = {158},
  year         = {2009},
}