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

Mark Manfredo and Raymond M. Leuthold
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Raymond M. Leuthold: University of Illinois at Urbana-Champaign

Finance from University Library of Munich, Germany

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-codes: G (search for similar items in EconPapers)
Pages: 29 pages
Date: 1999-08-19
Note: Type of Document - PDF; prepared on IBM PC ; pages: 29 ; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 99-04. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:9908002

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