Spatial energy market risk analysis. I. An introduction to downside risk measures

The paper concentrates on the analysis of semivariance (SV) as a market risk measure that is incorporated in mean-semivariance (MSV) portfolios. The advantage of SV over variance as a risk measure is analyzed. In addition, the relationship of the SV with the lower partial movements is discussed. Despite its problems, the MSV provides a more logical measure of risk than the mean-variance method. A risk model is proposed in the paper as a basis for risk assessment in short-term energy markets. Transaction costs and other practical constraints are also included in the model. The first part of the joint paper conducts an extensive literature search and analysis of the semivariance risk measure and other related downside risk measures.