ENERGY MARKET RISK MANAGEMENT UNDER UNCERTAINTY: A VAR BASED ON WAVELET APPROACH

Huthaifa Sameeh Alqaralleh,Ahmad Al-Saraireh,Alessandra Canepa

doi:10.32479/ijeep.11404

Abstract

This study contributes to the literature on energy market risk management and portfolio management by examining co-movements between several energy commodities in a portfolio context in light of the impact of several types of uncertainty over time and under high, medium, and low frequencies. Using of wavelet decomposition analysis, we first investigate the lead-lag relationship together with the power of the correlation over time between major renewable and non-renewable energy indexes and uncertainty indexes. Second, we explore the contribution of uncertainty to the energy portfolio. Our procedure reveals that a dependent relationship generally exists between energy returns and changes in uncertainty. The risks of clean energy and crude oil returns are more sensitive to financial uncertainties, whereas investing in GAS markets offers market diversification opportunities during periods of energy uncertainty. Keywords: VaR Based on Wavelet Approach; Energy market, UncertaintyJEL Classifications: C580; G15; E440.DOI: https://doi.org/10.32479/ijeep.11404

Highlights

In recent years, investing in the energy markets has been a notable part of the lifeblood in production process and, in the world’s economic systems and social development
We consider the daily data for the S and P 500 Global Clean Energy Index (CEX), the crude oil prices (OIL) and the natural gas prices (GAS) covering the sample period from May 10, 2007 to April 13, 2017
Following Fernández-Rodríguez et al (2016) we investigate the impact of uncertainty on the energy portfolio based on Wavelet Value at Risk (WVaR), which is a robust market-based measure of systemic risk across energy markets of differing length

Summary

INTRODUCTION

In recent years, investing in the energy markets has been a notable part of the lifeblood in production process and, in the world’s economic systems and social development. As noted by Nalebuff and Scharfstein (1987), the economic cycle is not constant over time among asset returns and can generate asymmetric information This is further supported in the seminal work of Barrero et al (2017), where the authors emphasise that investing in the energy market ( in fossil fuels) is more sensitive to short-term economic uncertainty, while policy uncertainty is related to long-term uncertainty. This study contributes to the literature on energy market risk management and portfolio management by examining co-movements between several energy commodities in a portfolio context and considering the impact of several types of uncertainty over time and under high, medium and low frequencies To this end, the current research addresses the following questions, in turn: (i) Is there any extreme value dependence between energy commodities and different types of uncertainty?

THE ECONOMETRICS APPROACH

DATA, EMPIRICAL RESULTS AND DISCUSSION

CONCLUSION AND POLICY IMPLICATIONS