Abstract

This research studies a decision problem to allocate an electricity trading firm’s budget to its trading strategies using a risk management framework. The considered problem consists of maximizing a firm’s profit while controlling two risk measures: the variance of the portfolio and the conditional value at risk. The dependence structure of the returns associated with different trading strategies is modelled using vine copulas and it is assumed that the marginal distribution of the returns originates from the Johnson family of distributions. The studied problem is formulated as a stochastic integer quadratic program and solved it with a commercial optimization software. The proposed mathematical program is assessed on the firm’s portfolio and the obtained results are discussed.