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| Author: | Borovkova, S. |
| Title: | Detecting market transitions and energy futures risk management using principal components |
| Journal: | European Journal of Finance
2006 : SEP/OCT, VOL. 12:6-7, p. 495-512 |
| Index terms: | gas industry petroleum industry natural resources energy commodity futures markets forecasting evaluation risk management |
| Language: | eng |
| Abstract: | This study presents an empirical approach to analysing the forward curve (here as: f-c.) dynamics of energy futures. For non-seasonal commodities (as: comms.), e.g. crude oil, the f-c. is well described by the first 3 principal components: i. the level, ii. slope and iii. curvature. A principal component (as: pr-c.) indicator is described detecting transitions btw. the 2 fundamental market states. For seasonal comms., e.g. electricity and natural gas, it is shown how to extract the seasonal component from the f-c. The pr-c. indicator can be applied to the de-seasoned f-c. to detect significant price deviations possibly supporting profitable trading strategies. A pr-c. approach to f-c. modelling is applied to computing portfolio value-at-risk. This approach is combined with a new 2-step resampling procedure to improve value-at-risk estimates. |
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