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Agricultural Applications of Value-at-Risk Analysis: A Perspective

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Author Info
Mark R. Manfredo (University of Illinois at Urbana-Champaign)
Raymond M. Leuthold
Abstract

Value-at-Risk (VaR) determines the probability of a portfolio of assets losing a certain amount in a given time period due to adverse market conditions with a particular level of confidence. Value-at-Risk has received considerable attention from financial economists and financial practitioners for its use in risk reporting, in particular the risks of derivatives. This paper provides a "state-of-the-art" review of VaR estimation techniques and empirical findings found in the finance literature. The ability of VaR estimates to represent large losses associated with tail events varies among procedure, confidence level, and data used. To date, there is no consensus to the most appropriate estimation technique. Potential applications of Value-at-Risk are suggested in the context of agricultural risk management. In the wake of the Hedge-to-Arrive crisis, the lifting of agricultural trade options by the CFTC, and the decreased government participation, VaR seems to have a place in the agricultural risk manager's toolkit.

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Paper provided by EconWPA in its series Finance with number 9805002.

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Length: 14 pages
Date of creation: 04 May 1998
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Handle: RePEc:wpa:wuwpfi:9805002

Note: Type of Document - pdf; prepared on pc; to print on HP Laserjet; pages: 14. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-04. For a complete list of OFOR working papers see
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Related research
Keywords: Value-at-Risk; risk management; estimation procedures;

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Find related papers by JEL classification:
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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  1. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69. [Downloadable!]
  2. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 334-362.
  3. Thomas J. Linsmeier & Neil D. Pearson, 1996. "Risk Measurement: An Introduction to Value at Risk," Finance 9609004, EconWPA. [Downloadable!]
  4. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59. [Downloadable!] (restricted)
  5. Gregory P. Hopper, 1996. "Value at risk: a new methodology for measuring portfolio risk," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 19-31. [Downloadable!]
  6. Linsmeier, Thomas J. & Pearson, Neil D., 1996. "Risk measurement: an introduction to value at risk," ACE Reports 14796, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics. [Downloadable!]
  7. Peter F. Christoffersen & Francis X. Diebold, 1997. "How Relevant is Volatility Forecasting for Financial Risk Management?," Center for Financial Institutions Working Papers 97-45, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  8. Subu Venkataraman, 1997. "Value at risk for a mixture of normal distributions: the use of quasi- Bayesian estimation techniques," Economic Perspectives, Federal Reserve Bank of Chicago, issue Mar, pages 2-13. [Downloadable!]
  9. Francis X. Diebold & Andrew Hickman & Atsushi Inoue & Til Schuermann, 1997. "Converting 1-Day Volatility to h-Day Volatitlity: Scaling by Root-h is Worse Than You Think," Center for Financial Institutions Working Papers 97-34, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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