Financial Portfolio Optimization in Turkish Electricity Market via Value at Risk
Electricity has an indispensable role in human daily life, technological development and economy. It is a special product or service that should be instantaneously generated and consumed. Sources of the world are limited so that effective and efficient use of them is very important not only for human life and environment but also for technological and economic development. Competitive electricity market is one of the important way that provides suitable platform for effective and efficient use of electricity. Besides benefits, it brings along some risks that should be carefully managed by a market player like Electricity Generation Company. Risk management is an essential part in market players’ decision making. In this paper, risk management through diversification is applied with the help of Value at Risk methods for case studies. Performance of optimal electricity sale solutions are measured and the portfolio performance has been evaluated via Sharpe-Ratio, and compared with conventional approach. Biennial historical electricity price data of Turkish Day Ahead Market are used to demonstrate the approach.
[1] International Energy Agency (IEA), World Energy Outlook 2015, Paris, France: OECD/IEA, 2015.
[2] BP Official Web Site, (2015, July 30), BP Energy outlook 2030 Report, retrieved from http://www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-Outlook/BP_Energy_Outlook_Booklet_2013.pdf.
[3] M. Liu, F. F. Wu, and Y. Ni, “A survey on risk management in electricity markets,” in Proc. IEEE Power Engineering Society General Meeting, Montreal, Quebec, 2006, pp. 1-6.
[4] H. Markowitz, “Portfolio selection,” Journal of Finance, vol. 48, pp. 77-91, 1952.
[5] F. Gökgöz, and M. E. Atmaca, “Financial optimization in the Turkish electricity market: Markowitz’s mean-variance approach,” Renewable and Sustainable Energy Reviews, vol. 16, no. 4, pp. 357-368, Jan. 2012.
[6] M. Statman, “How many stocks make a diversified portfolio?,” Journal of Financial and Quantitative Analysis, vol. 22, no. 3, pp. 353-363, 1987.
[7] C. P. Jones, Investments Analysis and Management, New York, NY: John Wiley & Sons, 1999.
[8] T. E. Copeland, J. F. Weston, and K. Shastri, Financial Theory and Corporate Policy. USA: Pearson Addison Wesley, 2005.
[9] Nobelprize.org., (2016, May 15), Nobel Prizes and Laureates, retrieved from http://www.nobelprize.org/nobel_prizes/economic-sciences/.
[10] W. F. Sharpe, G. J. Alexander, and J. V. Bailey, Investments, New Jersey, USA: Prentice Hall, 1999.
[11] M. Liu, and F. F. Wu, “Managing price risk in a multimarket environment,” IEEE Transactions on Power Systems, vol. 21, no. 4, pp. 1512-1519, Nov. 2006.
[12] M. E. Atmaca, Portfolio optimization in electricity market, (Thesis No: 313125), Ankara, Turkey: Council of Higher Education Thesis Center, 2010.
[13] F. Gökgöz, M. E. Atmaca, “Portfolio Optimization under Lower Partial Moments in Emerging Electricity Markets: Evidence from Turkey,” Renewable and Sustainable Energy Reviews, 67, pp. 437-449, Jan. 2017 (http://dx.doi.org/10.1016/j.rser.2016.09.029).
[14] H. M. Markowitz, “The Early History of Portfolio Theory”, Financial Analysts Journal, vol. 55, no. 4, pp. 5-16, 1999.
[15] W. F. Sharpe, “Capital asset prices: A theory of market equilibrium under condition of risk,” Journal of Finance, vol. 19, no. 3, pp. 425-442, Sep. 1964.
[16] J. Linther, “Security prices, risk, and maximal gains from diversification,” Journal of Finance, vol. 20, no. 4, pp. 587-615, Dec. 1965.
[17] J. Linther, “The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets,” The Review of Economics and Statistics, vol. 47, no. 1, pp. 13-37, 1965.
[18] F. Gökgöz, and M. E. Atmaca, “Optimal Asset Allocation in the Turkish Electricity market: Down-Side vs Semi-Variance Risk Approach”, in Proc. The 2013 International Conference of Financial Engineering of World Congress on Engineering (ICFE), London, UK, 2013.
[19] Z. Bodie, A. Kane, and A. J. Marcus, Investments, New York, USA: McGraw-Hill Irwin, 2009.
[20] F. Donghan, G. Degiang, J. Zhong, and Y. Ni, “Supplier asset allocation in a pool-based electricity market,” IEEE Transactions on Power Systems, vol. 22, no. 3, pp. 1129-1138, Aug. 2007.
[21] X. Guan, J. Wu, F. Gao, and G. Sun, “Optimization-based generation asset allocation for forward and spot markets, IEEE Transactions on Power Systems, vol. 23, no. 4, pp. 1796-1808, 2008.
[22] F. Gökgöz, “Mean variance optimization via factor models in the emerging markets: evidence on the Istanbul Stock Exchange”, Investment Management and Financial Innovations, vol. 6, no. 3, pp. 43-53, 2009.
[23] G. A. Marrero, L. A. Punch, and F. J. Ramos-Real, “Mean-variance portfolio methods for energy policy risk management”, International Review of Economics and Finance, vol .40, pp. 246-264, 2015.
[24] G. A. Holton, Value-at-Risk: Theory and Practice, e-book published by Author at www.value-at-risk.net, 2014.
[25] G. A. Holton, History of Value-at-Risk 1922-1998, Working Paper at https://www.glynholton.com/, 2002.
[26] A. A. Gaivoronski, and G. Pflug, “Value-at-Risk in Portfolio Optimization: Properties and Computational Approach”, Journal of Risk, vol. 7, no. 2, pp. 1-31, Winter 2004-2005.
[27] T. J. Linsmeier, and N. D. Pearson, “Value at Risk”, Financial Analysts Journal, vol. 56, no. 2, pp. 47-67, 2000.
[28] F. Gökgöz, and M. E. Atmaca, “An Optimal Asset Allocation in Electricity Generation Market for the Policy Makers and Stakeholders”, Handbook of Research on Managerial Solutions in Non-Profit Organizations, Ch. 21, Hersley, USA: IGI Global Publication, 2016(DOI: 10.4018/978-1-5225-0731-4).
[29] M. H. Cohen, and V. D. Natoli, “Risk and utility in portfolio optimization,” Physica A: Statistical Mechanics and its Applications, vol. 324, no. 1-2, pp. 81-88, Jun. 2003.
[30] R. A. Defusco, D. W. McLeavey, J. E. Pinto, and D. E. Runkle, Quantitative Investment Analysis, USA: John Wiley & Sons Inc., 2004.
[31] D. King, “Portfolio optimization and diversification,” Journal of Asset Management, vol. 8, no. 5, pp. 296-307, Dec. 2007.
[32] M. Liu, and F. F. Wu, “Portfolio optimization in electricity markets,” Electric Power Systems Research, vol. 77, no. 8, pp. 1000-1009, June 2007.
[33] E. Gökgöz, Riske Maruz Değer (VaR) ve Portföy Optimizasyonu (Value-at-Risk and Portfolio Optimization), Ankara, Turkey: Sermaye Piyasası Kurulu, 2006.
[34] E. Kreyszig, Advanced Engineering Mathematics, Singapore: John Wiley & Sons, Inc., 1993.
[35] M. B. Karan, Investment Analysis and Portfolio Management (Yatırım Analizi ve Portföy Yönetimi), Ankara, Turkey: Gazi Kitabevi, 2004.
[36] The World Bank web site, (2016, Nov 30), retrieved from http://www.worldbank.org/en/country/turkey.
[37] H. K. Öztürk, A. Yılancı, and Ö. Atalay, “Past, Present and Future Status of Electricity in Turkey and the Share of Energy Sources,” Renewable and Sustainable Energy Reviews, vol. 11, no. 2, pp. 183-209, Feb. 2007.
[38] N. Bağdadioğlu, and N. Ödyakmaz, “Turkish Electricity Reform,” Utility Policy, vol. 17, no. 1, pp. 144-152, Mar. 2009.
[39] Energy Institute web site, (2016, May 15), Turkish Installed Capacity Based on Fuel Type, retrieved from http://enerjienstitusu.com/turkiye-kurulu-elektrik-enerji-gucu-mw/.
[40] Republic of Turkey Energy Market Regulatory Authority web site, (2016, May 15), retrieved from www.epdk.org.tr/TR/Dokuman/1680.
[41] Republic of Turkey Energy Market Regulatory Authority web site, (2016, October 15), retrieved from https://www.epias.com.tr/gun-ici-piyasasi/surecler.
[1] International Energy Agency (IEA), World Energy Outlook 2015, Paris, France: OECD/IEA, 2015.
[2] BP Official Web Site, (2015, July 30), BP Energy outlook 2030 Report, retrieved from http://www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-Outlook/BP_Energy_Outlook_Booklet_2013.pdf.
[3] M. Liu, F. F. Wu, and Y. Ni, “A survey on risk management in electricity markets,” in Proc. IEEE Power Engineering Society General Meeting, Montreal, Quebec, 2006, pp. 1-6.
[4] H. Markowitz, “Portfolio selection,” Journal of Finance, vol. 48, pp. 77-91, 1952.
[5] F. Gökgöz, and M. E. Atmaca, “Financial optimization in the Turkish electricity market: Markowitz’s mean-variance approach,” Renewable and Sustainable Energy Reviews, vol. 16, no. 4, pp. 357-368, Jan. 2012.
[6] M. Statman, “How many stocks make a diversified portfolio?,” Journal of Financial and Quantitative Analysis, vol. 22, no. 3, pp. 353-363, 1987.
[7] C. P. Jones, Investments Analysis and Management, New York, NY: John Wiley & Sons, 1999.
[8] T. E. Copeland, J. F. Weston, and K. Shastri, Financial Theory and Corporate Policy. USA: Pearson Addison Wesley, 2005.
[9] Nobelprize.org., (2016, May 15), Nobel Prizes and Laureates, retrieved from http://www.nobelprize.org/nobel_prizes/economic-sciences/.
[10] W. F. Sharpe, G. J. Alexander, and J. V. Bailey, Investments, New Jersey, USA: Prentice Hall, 1999.
[11] M. Liu, and F. F. Wu, “Managing price risk in a multimarket environment,” IEEE Transactions on Power Systems, vol. 21, no. 4, pp. 1512-1519, Nov. 2006.
[12] M. E. Atmaca, Portfolio optimization in electricity market, (Thesis No: 313125), Ankara, Turkey: Council of Higher Education Thesis Center, 2010.
[13] F. Gökgöz, M. E. Atmaca, “Portfolio Optimization under Lower Partial Moments in Emerging Electricity Markets: Evidence from Turkey,” Renewable and Sustainable Energy Reviews, 67, pp. 437-449, Jan. 2017 (http://dx.doi.org/10.1016/j.rser.2016.09.029).
[14] H. M. Markowitz, “The Early History of Portfolio Theory”, Financial Analysts Journal, vol. 55, no. 4, pp. 5-16, 1999.
[15] W. F. Sharpe, “Capital asset prices: A theory of market equilibrium under condition of risk,” Journal of Finance, vol. 19, no. 3, pp. 425-442, Sep. 1964.
[16] J. Linther, “Security prices, risk, and maximal gains from diversification,” Journal of Finance, vol. 20, no. 4, pp. 587-615, Dec. 1965.
[17] J. Linther, “The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets,” The Review of Economics and Statistics, vol. 47, no. 1, pp. 13-37, 1965.
[18] F. Gökgöz, and M. E. Atmaca, “Optimal Asset Allocation in the Turkish Electricity market: Down-Side vs Semi-Variance Risk Approach”, in Proc. The 2013 International Conference of Financial Engineering of World Congress on Engineering (ICFE), London, UK, 2013.
[19] Z. Bodie, A. Kane, and A. J. Marcus, Investments, New York, USA: McGraw-Hill Irwin, 2009.
[20] F. Donghan, G. Degiang, J. Zhong, and Y. Ni, “Supplier asset allocation in a pool-based electricity market,” IEEE Transactions on Power Systems, vol. 22, no. 3, pp. 1129-1138, Aug. 2007.
[21] X. Guan, J. Wu, F. Gao, and G. Sun, “Optimization-based generation asset allocation for forward and spot markets, IEEE Transactions on Power Systems, vol. 23, no. 4, pp. 1796-1808, 2008.
[22] F. Gökgöz, “Mean variance optimization via factor models in the emerging markets: evidence on the Istanbul Stock Exchange”, Investment Management and Financial Innovations, vol. 6, no. 3, pp. 43-53, 2009.
[23] G. A. Marrero, L. A. Punch, and F. J. Ramos-Real, “Mean-variance portfolio methods for energy policy risk management”, International Review of Economics and Finance, vol .40, pp. 246-264, 2015.
[24] G. A. Holton, Value-at-Risk: Theory and Practice, e-book published by Author at www.value-at-risk.net, 2014.
[25] G. A. Holton, History of Value-at-Risk 1922-1998, Working Paper at https://www.glynholton.com/, 2002.
[26] A. A. Gaivoronski, and G. Pflug, “Value-at-Risk in Portfolio Optimization: Properties and Computational Approach”, Journal of Risk, vol. 7, no. 2, pp. 1-31, Winter 2004-2005.
[27] T. J. Linsmeier, and N. D. Pearson, “Value at Risk”, Financial Analysts Journal, vol. 56, no. 2, pp. 47-67, 2000.
[28] F. Gökgöz, and M. E. Atmaca, “An Optimal Asset Allocation in Electricity Generation Market for the Policy Makers and Stakeholders”, Handbook of Research on Managerial Solutions in Non-Profit Organizations, Ch. 21, Hersley, USA: IGI Global Publication, 2016(DOI: 10.4018/978-1-5225-0731-4).
[29] M. H. Cohen, and V. D. Natoli, “Risk and utility in portfolio optimization,” Physica A: Statistical Mechanics and its Applications, vol. 324, no. 1-2, pp. 81-88, Jun. 2003.
[30] R. A. Defusco, D. W. McLeavey, J. E. Pinto, and D. E. Runkle, Quantitative Investment Analysis, USA: John Wiley & Sons Inc., 2004.
[31] D. King, “Portfolio optimization and diversification,” Journal of Asset Management, vol. 8, no. 5, pp. 296-307, Dec. 2007.
[32] M. Liu, and F. F. Wu, “Portfolio optimization in electricity markets,” Electric Power Systems Research, vol. 77, no. 8, pp. 1000-1009, June 2007.
[33] E. Gökgöz, Riske Maruz Değer (VaR) ve Portföy Optimizasyonu (Value-at-Risk and Portfolio Optimization), Ankara, Turkey: Sermaye Piyasası Kurulu, 2006.
[34] E. Kreyszig, Advanced Engineering Mathematics, Singapore: John Wiley & Sons, Inc., 1993.
[35] M. B. Karan, Investment Analysis and Portfolio Management (Yatırım Analizi ve Portföy Yönetimi), Ankara, Turkey: Gazi Kitabevi, 2004.
[36] The World Bank web site, (2016, Nov 30), retrieved from http://www.worldbank.org/en/country/turkey.
[37] H. K. Öztürk, A. Yılancı, and Ö. Atalay, “Past, Present and Future Status of Electricity in Turkey and the Share of Energy Sources,” Renewable and Sustainable Energy Reviews, vol. 11, no. 2, pp. 183-209, Feb. 2007.
[38] N. Bağdadioğlu, and N. Ödyakmaz, “Turkish Electricity Reform,” Utility Policy, vol. 17, no. 1, pp. 144-152, Mar. 2009.
[39] Energy Institute web site, (2016, May 15), Turkish Installed Capacity Based on Fuel Type, retrieved from http://enerjienstitusu.com/turkiye-kurulu-elektrik-enerji-gucu-mw/.
[40] Republic of Turkey Energy Market Regulatory Authority web site, (2016, May 15), retrieved from www.epdk.org.tr/TR/Dokuman/1680.
[41] Republic of Turkey Energy Market Regulatory Authority web site, (2016, October 15), retrieved from https://www.epias.com.tr/gun-ici-piyasasi/surecler.
@article{"International Journal of Business, Human and Social Sciences:74538", author = "F. Gökgöz and M. E. Atmaca", title = "Financial Portfolio Optimization in Turkish Electricity Market via Value at Risk", abstract = "Electricity has an indispensable role in human daily life, technological development and economy. It is a special product or service that should be instantaneously generated and consumed. Sources of the world are limited so that effective and efficient use of them is very important not only for human life and environment but also for technological and economic development. Competitive electricity market is one of the important way that provides suitable platform for effective and efficient use of electricity. Besides benefits, it brings along some risks that should be carefully managed by a market player like Electricity Generation Company. Risk management is an essential part in market players’ decision making. In this paper, risk management through diversification is applied with the help of Value at Risk methods for case studies. Performance of optimal electricity sale solutions are measured and the portfolio performance has been evaluated via Sharpe-Ratio, and compared with conventional approach. Biennial historical electricity price data of Turkish Day Ahead Market are used to demonstrate the approach.", keywords = "Electricity market, portfolio optimization, risk management, Sharpe ratio, value at risk.", volume = "10", number = "11", pages = "3733-11", }
