Original scientific paper

Measuring risk of crude oil at extreme quantiles

Saša Žiković ; Faculty of Economics, University of Rijeka, Rijeka, Croatia

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

Hrčak ID:

69459

URI

https://hrcak.srce.hr/69459

Publication date:

20.6.2011.

Article data in other languages: croatian

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