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

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Author Info
Mark R. Manfredo. (Arizona State University)
Raymond M. Leuthold (University of Illinois at Urbana-Champaign)
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 non-parametric, 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.

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Paper provided by EconWPA in its series Finance with number 9908002.

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Length: 29 pages
Date of creation: 19 Aug 1999
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Handle: RePEc:wpa:wuwpfi:9908002

Note: Type of Document - PDF; prepared on IBM PC ; pages: 29 ; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 99-04. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
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G - Financial Economics

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  1. 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!]
  2. Langemeier, Michael & Schroeder, Ted & Mintert, James, 1992. "Determinants Of Cattle Finishing Profitability," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 24(02), December. [Downloadable!]
  3. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179. [Downloadable!] (restricted)
  4. Jose A. Lopez, 1997. "Regulatory evaluation of value-at-risk models," Research Paper 9710, Federal Reserve Bank of New York. [Downloadable!]
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  5. 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!]
  6. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 334-362.
  7. Thomas J. Linsmeier & Neil D. Pearson, 1996. "Risk Measurement: An Introduction to Value at Risk," Finance 9609004, EconWPA. [Downloadable!]
  8. 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)
  9. 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!]
  10. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August. [Downloadable!] (restricted)
  11. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583. [Downloadable!] (restricted)
  12. Anil K. Bera & Philip Garcia & Jae-Sun Roh, 1997. "Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches," Finance 9712007, EconWPA. [Downloadable!]
  13. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June. [Downloadable!] (restricted)
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