Systematic Trading in Energy Markets
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Portfolio Construction
Joaquin Narro and Monica Caamano
Portfolio Construction
Introduction
The Energy Supply and Demand Conundrum
A Brief History of Energy Markets
Systematic Trading in Energy Markets
The Trading Edge
Defining Trading Expectations
Exploring Technical Modelling in Idiosyncratic Energy Markets
Exploring Fundamental Modelling
Introducing Cycle Analysis and Monte Carlo Simulations
Data: Boundaries and Assumptions
Estimating Model Lifetime
Optimising Performance and Risk
Pitfalls in Systematic Model Development
Model Production
Portfolio Construction
Incorporating Human Behaviour
References
In this chapter we build a portfolio from two backward-looking strategies, with out-of-sample data for the period 2012 to 2017 used for backtesting. For the purpose of building a portfolio, we assume there are workable rules to trade one energy commodity per strategy. Our concern will be to figure out how to bring these two strategies together in a portfolio – that is, we would need to decide if the strategies complement each other and, if so, what the optimal ratio is that creates a superior portfolio. Finally, we provide a solution to sizing the portfolio to satisfy our needs according to our return-on-risk appetite.
| Contract | ICE EUA futures – front Dec |
| Currency | € |
| Lot size | 1,000 ton |
| Trading assumptions | |
| Exchange fees | 4 € / lot |
| Commissions | 5 € / lot |
| Bid–offer | 0.01 € / t |
| Size | 9 lots |
| Net includes | Exchange fee, commissions, bid–offer |
| Source: Authors’ own; Intercontinental Exchange | |
| Contract | ICE API2 Rotterdam coal futures – front month |
| Curre |
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