Applying standard value-at-risk (VaR) models to assets with non-normally distributed returns can lead to an underestimation of the true risk. Commodity futures returns are driven by continuous supply and demand shocks that lead to a distinct pattern of time-varying volatility. As a result of these specific risk characteristics, commodity returns create the ideal environment for testing the accuracy of VaR models. Therefore, this article examines the in- and out-of-sample performance of various VaR approaches for commodity futures investments. Our results suggest that dynamic VaR models such as the CAViaR and the GARCH-type VaR generally outperform traditional VaRs. These models can adequately incorporate the time-varying volatility of commodity returns, and are sensitive to significant changes in the series of commodity returns. This has important implications for the risk management of portfolios involving commodity futures positions. Risk managers willing to familiarize themselves with these complex models are rewarded with a VaR that shows the adequate level of risk even under extreme and rapidly changing market conditions, as well as under calm market periods, during which excessive capital reserves would lead to unnecessary opportunity costs.
This paper exhibits tests of the random walk hypothesis and market efficiency for seven Asian emerging markets as a result of the influence of financial market integration. Random walk properties of equity prices influence the return dynamic and determine the trade strategies of investors. To examine the stochastic properties of local index returns and to test the hypothesis that stock market prices follow a random walk, the single variance ratio tests of Lo and MacKinlay, as well as the multiple variance ratio test of Chow and Denning are employed. The multiple statistical comparison of variance ratios is based on the Studentized Maximum Modulus distribution with control of the joint-test's size. The weak-form market efficiency is also tested directly, using a nonparametric runs test. These tests are particularly useful for investigating stock prices the returns of which are frequently not distributed normally. Documented evidence shows that, from the perspective of local investors, weekly stock prices in major Asian emerging markets do not follow a random walk in the pre-liberalization period. However, in the post-liberalization period the weak-form efficiency hypothesis is generally adopted at the 5% level except for the smaller stock markets of Indonesia and Thailand. These empirical findings suggest that financial integration affects the return predictability in such a way that domestic investors might not be able to develop trading strategies allowing them to earn abnormal returns.
