Estimating Oil Price ’Value at Risk’ Modelling

Abstract

This paper proposes the utilization of Value at Risk (VaR) for the quantification of oil price risk. VaR offers an estimate of the maximum potential change in oil prices associated with a certain likelihood level, and serves as a tool for shaping risk management strategies. We examine three methods for calculating VaR: the conventional historical simulation approach, the historical simulation with ARMA forecasts (HSAF) method, introduced in this paper, and the variance-covariance method employing autoregressive conditional heteroskedasticity models for forecasts. In addition, we have done literature reviews on this topic, and oil and stock prices asymmetric volatility co-currently with the time of the estimation period. The findings of the analysis indicate that the HSAF methodology offers a versatile approach to VaR quantification. It adeptly aligns with the continuous movements of oil prices and facilitates efficient risk assessment.