Risk factors and value at risk in publicly traded companies of the energy sector

We analyze a sample of 64 oil and gas companies of the nonrenewable energy sector from 26 countries using daily observations on return on stock from July 15, 2003 to August 14, 2012.

A panel model with fixed effects and Tarch effects shows significant prices for specific risk factors including company size and debt-to-equity and significant prices for common risk factors including the U.S. Dow Jones market excess return, the Vix, the WTI price of crude oil, and the FX of the Euro, Chinese yuan, Brazilian real, Japanese yen and British pound vis-avis the U.S. dollar. The evidence from multivariate Garch-DCC models is that the companies have significant heterogeneity in response to specific and common factors. We show that the financial crisis of 2008 is the period of largest conditional volatility and DCC under exposure to all factors. Comparisons of one-day horizon value at risk show that Garch models without taking into account exposure underestimate value at risk. In accounting for the exposure to all factors, we find that both DCC and value at risk increase considerably during the financial crisis and remain larger in magnitude after the financial crisis of 2008.

We extend the empirical analysis to multivariate Garch with dynamic conditional correlations (DCC) methods on a company by company basis. We find significant heterogeneity across firms by examining the quantile distribution of the multivariate Garch-DCC parameter estimates. We compute one-day horizon value at risk based on the model estimated first and second moments and evaluate the performance of value at risk with a back-testing procedure. Our value at risk estimation shows that four companies are less risky at or below the 10^th quantile benchmark, they are Center Point Energy of the U.S, Pacific Gas and Electric of the U.S., Snam-Rete Gas of Italy and Exxon-Mobil of the U.S. Other four companies are riskier, above the 90^th quantile value at risk in the sample, namely GazProm of Russia, OGX of Brazil, Pacific Rubiales of Canada, and RWE of Germany so that the market is charging excess risk premium of those companies relative to the low risk benchmark.

Keywords: return on stocks, price of risk, value at risk, oil and gas industry, dynamic conditional correlation (DCC)  

JEL Classification Codes: G12; C3; Q3; L72