Facebook LinkedIn Twitter

IAEE Members and subscribers to The Energy Journal: Please log in to access the full text article or receive discounted pricing for this article.

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

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 multi-period 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.

Purchase ( $25 )

Energy Specializations: Energy Investment and Finance – Public and Private Risks, Risk Management; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
D81 - Criteria for Decision-Making under Risk and Uncertainty
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electricity, Value-at-Risk (VAR), Portfolio analysis, electric power trading

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

Published in Volume 26, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.