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Estimation and Analysis of VaR on forwards' data in Nordic Electricity Market

Streimikyte, Egle LU and Grainyte, Indre LU (2012) NEKN02 20121
Department of Economics
Abstract
It was intended with this research to estimate in-sample and out-of-sample Value-at-Risk(VaR) on forwards’ data in Nordic electricity market by using different parametric and nonparametric approaches and investigate which of them give the most accurate results after implementation of back-testing. There were two confidence levels of 95% and 99% used in this research.

After implementation of data analysis; the following approaches were chosen for calculation of VaR: basic HS, age-weighted HS, volatility-weighted HS, normal and t-distribution approaches. GARCH and EGARCH models were run with both normally and t-distributed innovations in order to account for volatility clustering.

The results obtained indicated that basic HS approach... (More)
It was intended with this research to estimate in-sample and out-of-sample Value-at-Risk(VaR) on forwards’ data in Nordic electricity market by using different parametric and nonparametric approaches and investigate which of them give the most accurate results after implementation of back-testing. There were two confidence levels of 95% and 99% used in this research.

After implementation of data analysis; the following approaches were chosen for calculation of VaR: basic HS, age-weighted HS, volatility-weighted HS, normal and t-distribution approaches. GARCH and EGARCH models were run with both normally and t-distributed innovations in order to account for volatility clustering.

The results obtained indicated that basic HS approach performed very well for all forwards with different delivery periods for estimation of both in-sample and out-of-sample VaR. However, this result should be considered with caution; as there is a threat of overestimation of risk noticed. Age-weighted HS approach applied for in-sample VaR underestimated the risk for quarterly and yearly forwards. Normal distribution approach accounting for volatility clustering also gave accurate results in every case for both in-sample and out-of-sample VaR. The relevance of taking different confidence levels was proven by the fact that t-distribution approach worked mostly when using 99%. (Less)
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author
Streimikyte, Egle LU and Grainyte, Indre LU
supervisor
organization
course
NEKN02 20121
year
type
H1 - Master's Degree (One Year)
subject
keywords
Value-at-Risk, parametric and non-parametric approaches, back-testing, Christoffersen test.
language
English
id
2701867
date added to LUP
2012-06-08 14:34:18
date last changed
2012-06-08 14:34:18
@misc{2701867,
  abstract     = {It was intended with this research to estimate in-sample and out-of-sample Value-at-Risk(VaR) on forwards’ data in Nordic electricity market by using different parametric and nonparametric approaches and investigate which of them give the most accurate results after implementation of back-testing. There were two confidence levels of 95% and 99% used in this research.

After implementation of data analysis; the following approaches were chosen for calculation of VaR: basic HS, age-weighted HS, volatility-weighted HS, normal and t-distribution approaches. GARCH and EGARCH models were run with both normally and t-distributed innovations in order to account for volatility clustering. 

The results obtained indicated that basic HS approach performed very well for all forwards with different delivery periods for estimation of both in-sample and out-of-sample VaR. However, this result should be considered with caution; as there is a threat of overestimation of risk noticed. Age-weighted HS approach applied for in-sample VaR underestimated the risk for quarterly and yearly forwards. Normal distribution approach accounting for volatility clustering also gave accurate results in every case for both in-sample and out-of-sample VaR. The relevance of taking different confidence levels was proven by the fact that t-distribution approach worked mostly when using 99%.},
  author       = {Streimikyte, Egle and Grainyte, Indre},
  keyword      = {Value-at-Risk,parametric and non-parametric approaches,back-testing,Christoffersen test.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Estimation and Analysis of VaR on forwards' data in Nordic Electricity Market},
  year         = {2012},
}