Value-at-Risk: Risk assessment for the portfolio of oil and gas producers

Frank Asche, Roy Dahl (roy.e.dahl@uis.no) and Atle Oglend

No 2013/3, UiS Working Papers in Economics and Finance from University of Stavanger

Abstract: During the last decade, Value-at-Risk (VaR) has become the most common tool to measure the exposure to short term financial risk for companies in the oil industry, in common with most other sectors. However, VaR has been criticized after the financial crisis for providing too optimistic risk estimates and allowing portfolio managers with inflated credit lines. The crisis hit companies extracting natural resources hard, and the oil and gas industry experienced a severe fall in prices, with Brent oil dropping from 40 to below 0 in just 6 months. During events like the financial crisis, companies need to rely on precise risk estimates to adjust their positions. We show that when asset prices are highly correlated, a typical feature in the oil and gas industry, companies are vulnerable to inaccurate estimates. The findings are also compared to a theoretical study using Monte Carlo.

Keywords: Value-at-Risk; Correlation; Oil; Diversification; Gas; Subordination (search for similar items in EconPapers)
JEL-codes: C10 C50 G10 G30 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2013-04-29
New Economics Papers: this item is included in nep-ene and nep-rmg
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