Estimating VaR and ES of the spot price of oil using futures-varying centiles
by Giacomo Scandroglio; Andrea Gori; Emiliano Vaccaro; Vlasios Voudouris
International Journal of Financial Engineering and Risk Management (IJFERM), Vol. 1, No. 1, 2013

Abstract: This paper illustrates the power of modern statistical modelling in estimating measures of market risk, here applied to the Brent and WTI spot price of oil. Both Value-at-Risk (VaR) and Expected Shortfall (ES) are cast in terms of conditional centiles based upon semi-parametric regression models. Using the GAMLSS statistical framework, we stress the important aspects of selecting a highly flexible parametric distribution (skewed Student's t-distribution) and of modelling both skewness and kurtosis as non-parametric functions of the price of oil futures. Furthermore, an empirical application characterises the relationship between spot oil prices and oil futures - exploiting the futures market to explain the dynamics of the physical market. Our results suggest that NYMEX WTI has heavier tails compared with the ICE Brent. Contrary to the common platitude of the industry, we argue that 'somebody knows something' in the oil business.

Online publication date: Sat, 04-May-2013

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