Energy markets need more than second-hand credit models

In the energy markets, models transplanted from financial markets often fall down when it comes to credit risk. This occurs for a variety of reasons, not least because energy markets are prone to seismic institutional and technological shifts, argues Vincent Kaminski

Vincent Kaminski

It is sometimes said that nobody ever defaults on an energy deal - they just declare force majeure and go to court to fight it out. Such sentiment is often heard on trading floors, and while it is an exaggeration, it has more than a grain of truth. The physical and institutional aspects of energy related transactions add a layer of complexity to the management of credit risk, often rendering models transplanted from financial markets ineffective.

The central notion of credit value-at-risk is a

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