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02 december 2013 Onderzoek Toezichtlabel Working Papers

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.

Working paper no. 403

403 - On agricultural commodities' extreme price risk

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authors

  • Maarten van Oordt
  • Philip Stork
  • Casper de Vries