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Title:Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk
Author(s):Manfredo, Mark R.; Leuthold, Raymond M.
Subject(s):portfolio losses
Risk Metrics
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 nonparametric, 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.
Issue Date:1999-08
Publisher:Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign
Series/Report:OFOR Working Paper Series, no. 99-04
Genre:Working / Discussion Paper
Publication Status:published or submitted for publication
Peer Reviewed:not peer reviewed
Date Available in IDEALS:2008-03-17

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