A risk model to compute the volatility and the need for collateral margins in energy futures contracts in Brazil
International Journal of Energy Sector Management
ISSN: 1750-6220
Article publication date: 10 August 2021
Issue publication date: 25 March 2022
Abstract
Purpose
Brazil is characterized by the inexistence of a more robust system of guarantees and rules to minimize risks and protect agents in energy futures contracts. In this sense, this study aims to answer the question of how a centralized clearing agent can compute safety margin requirements to help reduce the systemic risk of the energy futures contracts market in Brazil.
Design/methodology/approach
The intermediate steps and specific objectives are to analyze the volatility behavior, identify the autoregressive conditional heteroscedasticity effects and model the variance of the return series. Based on this, the authors calculate the value-at-risk and conditional value-at-risk metrics for the energy futures contracts. As a robustness test, the authors added a peak over threshold methodology from extreme values theory.
Findings
In general, monthly products require margins because of their higher variance. With the asymmetrical distribution of returns, the authors needed to consider different maintenance margins for the long and short positions. It was also shown that two guarantee margins were required to secure the contracts as follows: the initial margin and the maintenance margin. The three factors that defined the size of the maintenance margin the volatility, skewness and kurtosis of the return series.
Originality/value
The contribution of this study lies in promoting the understanding of the risk dimensions of the energy derivatives market in Brazil and it offers concrete recommendations for how to mitigate this risk through market mechanisms and structures. Similar arrangements can be applied to other emerging markets.
Keywords
Acknowledgements
This work was carried out with the support of Conselho Nacional de Desenvolvimento Científico e Tecnológico (Brazilian National Council for Scientific and Technological Development – CNPq), grant number 305641/2019-0, Fundação Carlos Chagas Filho de Amparo à Pesquisa do Estado do Rio de Janeiro (Carlos Chagas Filho Foundation for Research Support in the State of Rio de Janeiro – FAPERJ), grant number E-26/202.824/2018, Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (Coordination for the Improvement of Higher Education Personel – Brasil/ CAPES), Finance Code 001 and Aneel and Queiroz Galvão Energética S/A in the context of R&D program of Aneel no PD-622-0116/2017.
Citation
Argento, P., Klotzle, M.C., Figueiredo Pinto, A.C. and Gomes, L.L. (2022), "A risk model to compute the volatility and the need for collateral margins in energy futures contracts in Brazil", International Journal of Energy Sector Management, Vol. 16 No. 3, pp. 448-468. https://doi.org/10.1108/IJESM-02-2021-0008
Publisher
:Emerald Publishing Limited
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