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

Office for Futures & Options Research (OFOR) Working Paper No. 9904

30 Pages Posted: 25 Oct 1999

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: August 1999

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.

JEL Classification: G12, Q12

Suggested Citation

Manfredo, Mark Ronald and Leuthold, Raymond M., Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk (August 1999). Office for Futures & Options Research (OFOR) Working Paper No. 9904. Available at SSRN: https://ssrn.com/abstract=182635 or http://dx.doi.org/10.2139/ssrn.182635

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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