Measuring risk of crude oil at extreme quantiles

Saša Žiković

Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, 2011, vol. 29, issue 1, 9-31

Abstract: The purpose of this paper is to investigate the performance of VaR models at measuring risk for WTI oil one-month futures returns. Risk models, ranging from industry standards such as RiskMetrics and historical simulation to conditional extreme value model, are used to calculate commodity market risk at extreme quantiles: 0.95, 0.99, 0.995 and 0.999 for both long and short trading positions. Our results show that out of the tested fat tailed distributions, generalised Pareto distribution provides the best fit to both tails of oil returns although tails differ significantly, with the right tail having a higher tail index, indicative of more extreme events. The main conclusion is that, in the analysed period, only extreme value theory based models provide a reasonable degree of safety while widespread VaR models do not provide adequate risk coverage and their performance is especially weak for short position in oil.

Keywords: WTI oil; Value at Risk; VaR; extremes; extreme value theory (search for similar items in EconPapers)
JEL-codes: C14 C22 C46 G17 G32 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:rfe:zbefri:v:29:y:2011:i:1:p:9-31

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