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Electricity as a Risk Bearing Asset from a Portfolio Perspective, Studied Through the Concept of Value at Risk with a Time Varying Correlation Approach

Af Ugglas, Jacqueline LU and Guter, Victor LU (2014) EXTM10 20141
Department of Economics
Abstract
The purpose of this thesis is to examine if, from a portfolio perspective, the Value at Risk decreases when electricity is included as an asset to a portfolio of risk bearing assets and if this could have an impact on risk hedging strategies. The portfolio standard deviation used to calculate the Value at Risk is based on a Dynamic Conditional Correlation approach providing a time dependent correlation. Three Nordic industrial companies make up reference objects for the quantitative analysis. Findings show that electricity has a close to zero correlation, for all points in time, with all additionally examined assets. Therefore, it has a significant diversification effect on the portfolio variance and thereby reduces the Value at Risk. The... (More)
The purpose of this thesis is to examine if, from a portfolio perspective, the Value at Risk decreases when electricity is included as an asset to a portfolio of risk bearing assets and if this could have an impact on risk hedging strategies. The portfolio standard deviation used to calculate the Value at Risk is based on a Dynamic Conditional Correlation approach providing a time dependent correlation. Three Nordic industrial companies make up reference objects for the quantitative analysis. Findings show that electricity has a close to zero correlation, for all points in time, with all additionally examined assets. Therefore, it has a significant diversification effect on the portfolio variance and thereby reduces the Value at Risk. The portfolio weight allocated to electricity is however very limited, thereby reducing the possible overall effect to hedging strategies. (Less)
Please use this url to cite or link to this publication:
author
Af Ugglas, Jacqueline LU and Guter, Victor LU
supervisor
organization
course
EXTM10 20141
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Value at Risk, DCC, Electricity, Risk Bearing Assets, Variance, Correlation
language
English
id
4500543
date added to LUP
2014-08-18 13:51:24
date last changed
2014-08-18 13:51:24
@misc{4500543,
  abstract     = {The purpose of this thesis is to examine if, from a portfolio perspective, the Value at Risk decreases when electricity is included as an asset to a portfolio of risk bearing assets and if this could have an impact on risk hedging strategies. The portfolio standard deviation used to calculate the Value at Risk is based on a Dynamic Conditional Correlation approach providing a time dependent correlation. Three Nordic industrial companies make up reference objects for the quantitative analysis. Findings show that electricity has a close to zero correlation, for all points in time, with all additionally examined assets. Therefore, it has a significant diversification effect on the portfolio variance and thereby reduces the Value at Risk. The portfolio weight allocated to electricity is however very limited, thereby reducing the possible overall effect to hedging strategies.},
  author       = {Af Ugglas, Jacqueline and Guter, Victor},
  keyword      = {Value at Risk,DCC,Electricity,Risk Bearing Assets,Variance,Correlation},
  language     = {eng},
  note         = {Student Paper},
  title        = {Electricity as a Risk Bearing Asset from a Portfolio Perspective, Studied Through the Concept of Value at Risk with a Time Varying Correlation Approach},
  year         = {2014},
}