Risk quantification and validation for green energy markets: New insight from a credibility theory approach

Khreshna Syuhada and Arief Hakim

Finance Research Letters, 2024, vol. 62, issue PA

Abstract: We aimed at constructing the Credible VaR (Credible ES) forecast for a target green energy instrument by combining its VaR (ES) forecast and the expected VaR (expected ES) forecast for all green energy instruments. Using return data for eleven sectoral green energy indices, we revealed the tendency of their risks to decline following the Paris Agreement but then substantially increase during COVID-19 and the Russia–Ukraine conflict. Despite a much higher trust in the VaR (ES) forecast, the resulting Credible VaR (Credible ES) forecast performed relatively better, as validated through backtesting, thereby improving investment strategies and decision-making through risk sharing.

Keywords: Green energy; Paris agreement; Quantitative risk management; Credible value-at-risk; Credible expected shortfall; Backtesting (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001703

DOI: 10.1016/j.frl.2024.105140

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