Extreme value theory and risk management in electricity markets

Kam Fong Chan, Philip Gray

Research output: Chapter in Book/Report/Conference proceedingChapter (Book)Researchpeer-review

1 Citation (Scopus)

Abstract

This chapter explores the relative merits of a number of alternate approaches to estimating Value at Risk (VaR) for electricity markets. The distinctive features of electricity markets present non-trivial challenges for the trading and hedging activities of market participants. Compared to traditional approaches to forecasting VaR, the empirical findings provide strong support for the use of Extreme Value Theory (EVT). However, more sophisticated conditional EVT approaches do not necessarily outperform vanilla EVT approaches. Furthermore, the left tail of the return distribution proves particularly challenging to model. Given the idiosyncrasies of each electricity market, it is unlikely that a single approach is optimal across the board.

Original languageEnglish
Title of host publicationExtreme Events in Finance: A Handbook of Extreme Value Theory and its Applications
EditorsFrançois Longin
Place of PublicationHoboken NJ USA
PublisherJohn Wiley & Sons
Pages405-425
Number of pages21
ISBN (Electronic)9781118650202
ISBN (Print)9781118650196
DOIs
Publication statusPublished - 2017

Keywords

  • Electricity prices
  • Extreme value theory
  • GARCH
  • Risk Management
  • Value-at-Risk

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