On Agricultural Commodities' Extreme Price Risk
33 Pages Posted: 3 Dec 2013
Date Written: December 2, 2013
Price risk is among the most substantial risk factors for farmers. Through a two-sector general equilibrium model, we describe how fat tails in agricultural prices may occur endogenously as a result of productivity shocks. Using thirty years of daily futures price data, we show that the returns of all agricultural commodities in our sample closely follow a power law in the tail of their distributions. We apply Extreme Value Theory to estimate the size and likelihood of the highest losses a farmer may encounter. Back-testing verifies the validity of these risk measurement methods.
Keywords: agricultural commodities, extreme value theory, heavy tails, risk management
JEL Classification: C14, Q11, Q14
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