Residual Shape Risk on Natural Gas Market with Mixed Jump Diffusion

Abstract

This paper introduces residual shape risk as a new subclass of energy commodity risk. Residual shape risk is caused by insufficient liquidity of energy forward market when retail energy supplier has to hedge his short sales by a non-flexible standard baseload product available on wholesale market. Because of this inflexibility energy supplier is left with residual unhedged position which has to be closed at spot market. The residual shape risk is defined as a difference between spot and forward prices weighted by residual unhedged position which size depends on the shape of customers' portfolio of a given retail energy supplier. We evaluated residual shape risk over the years 2014-2018 with a real portfolio of a leading natural gas retail supplier in the Czech Republic. The size of residual shape risk in our example corresponds approximately to 1 percent of profit margin of natural gas retail supplier.

Identifying Price Jumps from Daily Data with Bayesian vs. Non-Parametric Methods

“…In the in-sample period, the latent state variables will be estimated together with the model parameters with a MCMC (Markov-Chain Monte-Carlo) algorithm following Witzany (2013), based on earlier results in Jacquier et al (2007) and Johannes and Polson (2009).…”

“…discontinuous price changes) plays an important role in many areas of finance such as risk management, asset pricing, derivatives valuation and quantitative trading. Jumps significantly increase the size of the tails of the short-horizon return distribution, playing an important role in short-horizon VaR calculation (Witzany, 2013or Janda, Kourilek, 2020) and short-maturity option pricing (Fulop, Li and Yu, 2014). In addition to that, jumps exhibit different kind of dynamics than the continuous price volatility, most notably self-excitation and size-dependency (Fičura and Witzany, 2016), playing an important role in volatility forecasting (Corsi, Pirino, Reno, 2010).…”