Energy Market Orientied Total Risk Management: Theory, Model And Application

Under the background of deregulation of energy industry and establishment of energy market, the risk from prices volatility become a real threat to the operation of energy market participants, and also has significant impact on the revolution of domestic energy market. This paper took this background and focused on total risk management, performed a series of researches on theories and models and gained some innovative achievements.As a special commodity market, the function and price forming of energy market still follow the fundamental market mechanisms; on the other hand, they are related to the real energy economy with strong industry meanings. So before the main research, this paper analyzed the constitutions, structures, pricing mechanism and the impacting factors of price volatility, which serve as a primary foundation for the further study. Then we empirically investigated the pricing of Daqing crude oil from the viewpoint of risk forming and studied the spillover effect between Shanghai fuel future market and international oil markets by econometric models.This paper reviewed the origin of concept of risk and its evolution, discussed the definitions and implication of risk, which pointed out that the essence of risk is intrinsic uncertainty of the world, but the preference of the agent exposed to risk determines his subjective perceiving and evaluation. Actually, the agent in energy market is not only exposed to the uncertainty in the mean of probability, but also to the uncertainty introduced by time. We found these two dimensions have consistency in agent's construction of a risk event and proposed a definition of total risk.However, traditional risk management usually just considered individual or two factors of price, probability, time and preference. Though Andrew Lo proposed the framework of 3p's total risk management, he failed to integrate time. Considering the impact of time on energy market risk, this paper proposed the framework of 3P's-T total risk management that integrated time preference. Under this framework, we established a general theory of time-probability tradeoff, successfully derived an explicit formulation for transforming time to probability. In this formulation, an intrinsic discount function is used to connect time with probability, which supports the 3P's-T framework as well as builds a base for measuring and evaluating the energy market risk. The classic static risk-value model based on the intuition of risk-value tradeoff provides a normative framework for two-attribute evaluation and decision-making. This model was built on a preference related standard risk measure, and it could reflect the ideal of 3p's total risk management. Take advantage of the time-probability tradeoff theory, this paper added the time into the standard risk measure then obtained the inter-temporal risk measure model for energy market and further inter-temporal risk-value model that reflects the ideology of 3P's-T. In accordance with the different definition domains of object, an intertemporal relative risk-value model and an intertemporal risk-value model based on exponential utility were derived respectively. Finally, we used a classic intertemporal energy risk investment case to compare our method with traditional NPV method and found apparent difference. That is, in the same conditions, the time-probability tradeoff will give more conservative results, which reflects the substantial impact of time preference on intertemporal risk decision-making. In conclusion, our intertemporal risk-value model integrates intertemporal choice with risk evaluation, combines normative model with the preference of probability and time, and unifies the four fundamental factors—price, probability, time and preference into an explicit framework.