Systematic Trading in Energy Markets
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Optimising Performance and Risk
Joaquin Narro and Monica Caamano
Optimising Performance and Risk
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
We are interested in examining the performance of an investment adjusted to its risk. In this chapter, we define the main processes necessary for optimising performance and risk when developing a successful systematic energy trading model. These include considerations surrounding the choice of optimisation parameters, based on our understanding of performance and risk, incorporating realistic trading assumptions regarding, for example, commissions, slippage, trading volume and liquidity.
Conceptually, considerations about performance and risk can be applied during the development phase (for instance, to historical data during backtesting) or throughout the live phase of the investment (for instance, on net realised performance). We are going to illustrate this by backtesting a CO2 trading strategy based on ICE European Emission Allowances (EUA) futures with the assumptions described in Table 11.1, as of April 2018. These assumptions are meant to be realistic, although they do not represent a specific offer from any service provider.
| Contract | ICE EUA Futures – Front Dec | |
| Currency | EUR | |
| Lot size |
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