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

University of Illinois, Office for Futures and Options Research Working Paper No. 98-04

16 Pages Posted: 24 Sep 1998

See all articles by Mark R. Manfredo

Mark R. Manfredo

Arizona State University - Morrison School of Agribusiness and Resource Management

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign

Date Written: May 1998

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.

JEL Classification: Q11, C53

Suggested Citation

Manfredo, Mark Ronald and Leuthold, Raymond M., Agricultural Applications of Value-at-Risk Analysis: A Perspective (May 1998). University of Illinois, Office for Futures and Options Research Working Paper No. 98-04. Available at SSRN: https://ssrn.com/abstract=127008 or http://dx.doi.org/10.2139/ssrn.127008

Mark Ronald Manfredo (Contact Author)

Arizona State University - Morrison School of Agribusiness and Resource Management ( email )

7001 E. Williams Field Road
Mesa, AZ 85212
480-727-1040 (Phone)
480-727-1961 (Fax)

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign ( email )

1301 W. Gregory Drive
326 Mumford Hall
Urbana, IL 61801
United States
217-333-1810 (Phone)
217-333-5538 (Fax)

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