Multi-Period VaR-Constrained Portfolio Optimization with Applications to the Electric Power Sector

Paul R. Kleindorfer and Lide Li

The Energy Journal, 2005, vol. 26, issue 1, 1-26

Abstract: This paper considers the optimization of portfolios of real and contractual assets, including derivative instruments, subject to a Value-at-Risk (VaR) constraint, with special emphasis on applications in electric power. The focus is on translating VaR definitions for a longer period of time, say a year, to decisions on shorter periods of time, say a week or a month. Thus, if a VaR constraint is imposed on annual cash flows from a portfolio, translating this annual VaR constraint into appropriate risk management/VaR constraints for daily, weekly or monthly trades within the year must be accomplished. The paper first characterizes the multi-period VaR-constrained portfolio problem in the form Max {E - kV} subject to a set of separable constraints over the decision variables (the level of assets of different instruments contained in the portfolio), where E and V are, respectively, the expected value and variance of multiperiod cashflows from operations covered by the portfolio. Then, assuming the distribution of multi-period cashflows satisfies a certain regularity condition (which is a generalization of the standard Gaussian assumption underlying VaR), we derive computationally efficient methods for solving this problem that take the form of the standard quadratic programming formulations well-known in financial portfolio analysis.

Keywords: Electricity; Value-at-Risk (VAR); Portfolio analysis; electric power trading (search for similar items in EconPapers)
Date: 2005
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:26:y:2005:i:1:p:1-26

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No1-1

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