RISK EVALUATION OF LIVESTOCK COMMODITIES – VALUE-AT-RISK APPROACH

Abstract

This paper tries to assess the level of losses that investors in four livestock commodities might have. The analysis comprises live cattle, feeder cattle, lean hogs and milk class III, and for the risk calculation, we use parametric and historical VaR measures. Full sample is divided into pre-crisis and crisis subsamples. According to the results, lean hogs are the riskiest asset in the pre-crisis period, regarding both parametric and historical VaR. In the crisis period, milk is the riskiest asset in terms of parametric VaR in all probability levels. However, in terms of historical VaR, lean hogs have the highest potential of loses between 90-97% VaR, but at 99% VaR, milk takes upper hand. In the crisis period, the level of losses for lean hogs and milk exceeds 4% in one day at 99% probability, which means that these commodities should be hedged if investors want to avoid great losses. The results indicate that parametric VaR significantly deviates from historical VaR in both subsamples, which means that investors in livestock commodities should use historical VaR for downside risk measurement.

Keywords

• livestock commodities
• parametric and historical Valueat-Risk