Market risk in commodity markets: a VaR approach

We put forward Value-at-Risk models relevant for commodity traders who have long and short trading positions in commodity markets. In a 5-year out-of-sample study on aluminium, copper, nickel, Brent crude oil and WTI crude oil daily cash prices and cocoa nearby futures contracts, we assess the performance of the RiskMetrics, skewed Student APARCH and skewed student ARCH models. While the skewed Student APARCH model performs best in all cases, the skewed Student ARCH model delivers good results and its estimation does not require non-linear optimization procedures. As such this new model could be relatively easily integrated in a spreadsheet-like environment and used by market practitioners. 2003 Elsevier B.V. All rights reserved. JEL classifications: C52; C53; G15