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Estimation of value-at-risk for energy commodities via fat-tailed GARCH models

Authors :
Ming-Chih Lee
Hung-Chun Liu
Jui-Cheng Hung
Source :
Energy Economics. 30:1173-1191
Publication Year :
2008
Publisher :
Elsevier BV, 2008.

Abstract

The choice of an appropriate distribution for return innovations is important in VaR applications owing to its ability to directly affect the estimation quality of the required quantiles. This study investigates the influence of fat-tailed innovation process on the performance of one-day-ahead VaR estimates using three GARCH models (GARCH-N, GARCH-t and GARCH-HT). Daily spot prices of five energy commodities (WTI crude oil, Brent crude oil, heating oil #2, propane and New York Harbor Conventional Gasoline Regular) are used to compare the accuracy and efficiency of the VaR models. Empirical results suggest that for asset returns that exhibit leptokurtic and fat-tailed features, the VaR estimates generated by the GARCH-HT models have good accuracy at both low and high confidence levels. Additionally, MRSB indicates that the GARCH-HT model is more efficient than alternatives for most cases at high confidence levels. These findings suggest that the heavy-tailed distribution is more suitable for energy commodities, particularly VaR calculation.

Details

ISSN :
01409883
Volume :
30
Database :
OpenAIRE
Journal :
Energy Economics
Accession number :
edsair.doi...........d10d0d75f5c73a62aaef21ff1807e8e8
Full Text :
https://doi.org/10.1016/j.eneco.2007.11.004