Date of this Version
Cornhusker Economics (March 12, 2014)
In the last few months (Cornhusker Economics, 12/04/2013, 12/11/2013 and 2/12/2014), we talked about different ways to think about price risk in the soybean and corn markets. More specifically, two of the most popular risk measures that focus on potential losses: value-at-risk (VaR) and expected shortfall (ES), were discussed. The VaR shows the maximum loss for a given probability during a certain period of time. For example, the VaR for corn in Aug/05-May/13 was -5.62 percent, meaning that there was a 99 percent chance that the daily price change in the corn market would not exceed -5.62 percent, i.e., prices would not drop more than -5.62 percent in 99 out of 100 days. A follow-up question is “How much can we lose in that one day (out of 100 days) when prices drop more than 5.62 percent?” The ES answers this question by showing the average price change when the market goes beyond the VaR value. The ES complements the VaR, and both measures can be used together. In Aug/05-May/13 the ES for corn was -6.89 percent, i.e., in the one percent of the days when prices dropped more than the VaR estimated, the average price change was -6.89 percent.