DPazz

Is There an Alternative to Value at Risk?

traden4alpha is correct, most people interpret VaR to be the expected loss on a bad day. There is a measure for that called expected shortfall. Basically, when that 1 in 20 bad day happens, what loss can I expect to see.

However, even that has its limitations. It does not tell you how far out that tail goes.

For example, say VaR is $1. 99 times out of 100, when a VaR event occurs, you lose $1. 1 time out of 100 you lose $101. The expected shortfall would be $2 ( (99x1+101)/100 ). Needless to say, if you had planned on a $2 loss (or used VaR and planned on a $1 loss) and suffered a $101 loss, bad things are going to happen.

So, yes, we need a metric or series of metrics that take into account the shape of the loss distribution. They need to be easy to understand yet robust enough to describe the "fatness" of these tails. I'm still looking.

US Oil Companies Borrow A Page From OPEC's Playbook

No a shortage of refinaries would cause a shortage of refined products like gasoline. Crude oil supplies would build up because there is simply not enough refining capacity. The correlation between gas and crude would decouple. Gas would continue to rise, oil would fall or level off.

China's a different story. They don't have the envrionmental regulations around refinaries and will continue to build them as their demand grows. They will have the capacity to refine all their needs.

US Oil Companies Borrow A Page From OPEC's Playbook

So BP has a profit margin of around 8% and Citi has a profit margin of around 25%, but BP has "unfathomable" profits?

Ethonol is a way for politians to buy more votes in the big farm states (I say this as I drink my liquid corn, aka Pepsi). Without subsities, we need gas prices to be around $4 a gallon wholesale to make ethonol viable. If it wasn't a grab for votes, then we would be using sugar cane, which contains about 7 times the energy as corn.

With all the regulations and EPA permitting required, a new refinary requires gas to be about where it is now (which is why companies were looking at building them again). The government steps in and says, you have to use 20% ethonol in your mixture. That 20% decrease is enough to offset to viability of a new refinary. If you want more refinaries, tell your representitives to quit buying votes.