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University of Stavanger UiS Working Papers in Economics and Finance

No 2013/3:
Value-at-Risk: Risk assessment for the portfolio of oil and gas producers

Frank Asche (), Roy Endre Dahl () and Atle Oglend ()

Abstract: During the last decade, Value-at-Risk (VaR) has become the most common tool to measure the exposure to short term financial risk for companies in the oil industry, in common with most other sectors. However, VaR has been criticized after the financial crisis for providing too optimistic risk estimates and allowing portfolio managers with inflated credit lines. The crisis hit companies extracting natural resources hard, and the oil and gas industry experienced a severe fall in prices, with Brent oil dropping from 40 to below 0 in just 6 months. During events like the financial crisis, companies need to rely on precise risk estimates to adjust their positions. We show that when asset prices are highly correlated, a typical feature in the oil and gas industry, companies are vulnerable to inaccurate estimates. The findings are also compared to a theoretical study using Monte Carlo.

Keywords: Value-at-Risk; Correlation; Oil; Diversification; Gas; Subordination; (follow links to similar papers)

JEL-Codes: C10; C50; G10; G30; (follow links to similar papers)

26 pages, April 29, 2013

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