Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk

Manfredo, Mark R.; Leuthold, Raymond M.

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https://hdl.handle.net/2142/4025 Copy

Description

Title

Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk

Author(s)

• Manfredo, Mark R.
• Leuthold, Raymond M.

Issue Date

1999-08

Keyword(s)

• portfolio losses
• Risk Metrics

Abstract

Value-at-Risk, known as VaR, gives a prediction of potential portfolio losses, with a certain level of confidence, that may be encountered over a specified time period due to adverse price movements in the portfolio’s assets. For example, a VaR of 1 million dollars at the 95% level of confidence implies that overall portfolio losses should not exceed 1 million dollars more than 5% of the time over a given holding period. This research examines the effectiveness of VaR measures, developed using alternative estimation techniques, in predicting large losses in the cattle feeding margin. Results show that several estimation techniques, both parametric and nonparametric, provide well-calibrated estimates of VaR such that violations (losses exceeding the VaR estimate) are commensurate with the desired level of confidence. In particular, estimates developed using JP Morgan’s Risk Metrics methodology appear robust for instruments that have linear payoff structures such as cash commodity prices.

Publisher

Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign

Series/Report Name or Number

OFOR Working Paper Series, no. 99-04

Type of Resource

text

Language

en

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http://hdl.handle.net/2142/4025

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