A Comparison of Traditional and Copula based VaR with Agricultural portfolio

Maitreyi Mandal and Carl-Johan Lagerkvist

No 124387, 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington from Agricultural and Applied Economics Association

Abstract: Mean-Variance theory of portfolio construction is still regarded as the main building block of modern portfolio theory. However, many authors have suggested that the mean-variance criterion, conceived by Markowitz (1952), is not optimal for asset allocation, because the investor expected utility function is better proxied by a function that uses higher moments and because returns are distributed in a non-Normal way, being asymmetric and/or leptokurtic, so the mean-variance criterion cannot correctly proxy the expected utility with non-Normal returns. Copulas are a very useful tool to deal with non standard multivariate distribution. Value at Risk (VaR) and Conditional Value at Risk (CVaR) have emerged as a golden measure of risk in recent times. Though almost unutilized so far, as agriculture becomes more industrialized, there will be growing interest in these risk measures. In this paper, we apply a Gaussian copula and Student’s t copula models to create a joint distribution of return of two (Farm Return and S&P 500 Index Return) and three (Farm Return, S&P 500 Index Return and US Treasury Bond Index) asset classes and finally use VaR measures to create the optimal portfolio. The resultant portfolio offers better hedges against losses.

Keywords: Agricultural Finance; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 22
Date: 2012
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://ageconsearch.umn.edu/record/124387/files/P ... andal_Lagerkvist.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea12:124387

DOI: 10.22004/ag.econ.124387

Access Statistics for this paper

More papers in 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().