On Agricultural Commodities' Extreme Price Risk

33 Pages Posted: 3 Dec 2013

See all articles by Maarten R.C. van Oordt

Maarten R.C. van Oordt

Government of Canada - Bank of Canada

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2, 2013

Abstract

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

Suggested Citation

van Oordt, Maarten R.C. and Stork, Philip A. and De Vries, Casper, On Agricultural Commodities' Extreme Price Risk (December 2, 2013). De Nederlandsche Bank Working Paper No. 403. Available at SSRN: https://ssrn.com/abstract=2362305 or http://dx.doi.org/10.2139/ssrn.2362305

Maarten R.C. Van Oordt (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Casper De Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Register to save articles to
your library

Register

Paper statistics

Downloads
71
Abstract Views
520
rank
322,682
PlumX Metrics