On agricultural commodities’ extreme price risk

<p>We show how fat tails in agricultural commodity returns arise endogenously from productivity shocks in a standard macroeconomic model. Using nearly ninety years of data, we show that the eight agricultural commodities in our sample exhibit fat-tailed return distributions. Statistical tests confirm the heavy-tailedness of price spikes for agricultural commodities. We apply extreme value theory to estimate the size and likelihood of price spikes in agricultural commodities. Back-testing verifies the validity of our risk assessment methodology.</p>

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