Crisis Index Prediction Based on Momentum Theory and Earnings Downside Risk Theory: Focusing on South Korea’s Energy Industry

Abstract

(1) Background: The economic impact of supply and demand in the energy industry can be seen throughout raw material production, processing and distribution. The purpose of this study is to provide academic information to prepare for crisis management through prediction using indices. (2) Method: In order to predict a crisis of the energy industry, the Crisis Index presented by the Korea Institute of Science and Technology Information was utilized instead of the economic indicators that have hitherto been widely used. Specifically, we propose a new forecasting model based on the concept of economic momentum theory used in financial research and the proper weighting of the earning downside risk theory. Then, statistical empirical analysis was performed to verify the new prediction model. (3) Results: As the result of the empirical analysis, the risk index prediction model proposed in this study showed statistically significant results in predicting the future risk index. (4) Conclusions: This study proposed a risk prediction model using an index and thereby provides an academic analysis of the predictability of numerous indicators created for various purposes and, furthermore, provides implications for predicting crises in the Korean energy industry.

A Few Words of Introduction to a Holistic Approach to the Energy Market

“…In order to properly identify the various factors determining the functioning of the energy market and to meet the increasing challenges faced by the participants of this market, it is necessary to analyze it from various perspectives, including the economic and econometric perspective adopted by J. Cha et al in their studies on 'Crisis Index Prediction Based on Momentum Theory and Earnings Downside Risk Theory: Focusing on South Korea's Energy Industry' [13] and B. Gajdzik et al in their studies on 'An Econometric Model of the Operation of the Steel Industry in POLAND in the Context of Process Heat and Energy Consumption' [14]. Only a coherent and comprehensive, i.e., multidimensional, approach to the energy market allows the analysis to consider all the challenges facing this market.…”