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Extreme Measures of Agricultural Financial Risk

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  • Wyn Morgan
  • John Cotter
  • Kevin Dowd

Abstract

Risk is an inherent feature of agricultural production and marketing and accurate measurement of it helps inform more efficient use of resources. This paper examines three tail quantile-based risk measures applied to the estimation of extreme agricultural financial risk for corn and soybean production in the US: Value at Risk (VaR), Expected Shortfall (ES) and Spectral Risk Measures (SRMs). We use Extreme Value Theory (EVT) to model the tail returns and present results for these three different risk measures using agricultural futures market data. We compare the estimated risk measures in terms of their size and precision, and find that they are all considerably higher than normal estimates; they are also quite uncertain, and become more uncertain as the risks involved become more extreme.
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Suggested Citation

  • Wyn Morgan & John Cotter & Kevin Dowd, 2012. "Extreme Measures of Agricultural Financial Risk," Journal of Agricultural Economics, Wiley Blackwell, vol. 63(1), pages 65-82, February.
  • Handle: RePEc:bla:jageco:v:63:y:2012:i:1:p:65-82
    DOI: j.1477-9552.2011.00322.x
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    File URL: http://hdl.handle.net/10.1111/j.1477-9552.2011.00322.x
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    References listed on IDEAS

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    1. Ben White & P. J. Dawson, 2005. "Measuring Price Risk on UK Arable Farms," Journal of Agricultural Economics, Wiley Blackwell, vol. 56(2), pages 239-252.
    2. Siaplay, Mounir & Nganje, William E. & Kaitibie, Simeon, 2005. "Value-At-Risk And Food Safety Losses In Turkey Processing," Agribusiness & Applied Economics Report 23556, North Dakota State University, Department of Agribusiness and Applied Economics.
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    4. Acerbi, Carlo, 2002. "Spectral measures of risk: A coherent representation of subjective risk aversion," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1505-1518, July.
    5. Cotter, John, 2007. "Varying the VaR for unconditional and conditional environments," Journal of International Money and Finance, Elsevier, vol. 26(8), pages 1338-1354, December.
    6. Mark R. Manfredo & Raymond M. Leuthold, 2001. "Market risk and the cattle feeding margin: An application of Value-at-Risk," Agribusiness, John Wiley & Sons, Ltd., vol. 17(3), pages 333-353.
    7. Carter, Colin A. & Smith, Aaron D., 2004. "The Market Effect of a Food Scare: The Case of Genetically Modified StarLink Corn," Working Papers 11997, University of California, Davis, Department of Agricultural and Resource Economics.
    8. Odening, M. & Mußhoff, O., 2001. "Value at Risk – ein nützliches Instrument des Risikomanagement in Agrarbetrieben?," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 0.
    9. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    10. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
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    Cited by:

    1. Tarasov, Arthur, 2011. "Coherent Quantitative Analysis of Risks in Agribusiness: Case of Ukraine," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 0(Number 4), pages 1-7, December.
    2. Just, Małgorzata & Śmiglak-Krajewska, Magdalena, 2015. "Extreme Price Risk On The Market Of Rapeseeds And Processed Rapeseed Products In Poland," Roczniki (Annals), Polish Association of Agricultural Economists and Agribusiness - Stowarzyszenie Ekonomistow Rolnictwa e Agrobiznesu (SERiA), vol. 2015(Number 5), October.
    3. Husemann, Christoph & Novković, Nebojša, 2014. "Farm Management Information Systems: A Case Study On A German Multifunctional Farm," Economics of Agriculture, Institute of Agricultural Economics, vol. 0(Number 2), pages 1-13, June.
    4. Just, Małgorzata & Śmiglak-Krajewska, Magdalena, 2015. "Extreme Price Risk on the Market of Soybean Meal," Problems of World Agriculture / Problemy Rolnictwa Światowego, WydziaÅ‚ Nauk Ekonomicznych, Uniwersytet Warszawski, vol. 0(Number 30), pages 1-9, December.

    More about this item

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • N52 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - U.S.; Canada: 1913-

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