Modeling the Dependency between Extreme Prices of Selected Agricultural Products on the Derivatives Market Using the Linkage Function

Abstract

The purpose of the article is to identify and estimate the dependency model for the extreme prices of agricultural products listed on the Chicago Mercantile Exchange. The article presents the results of the first stage of research covering the time interval 1975–2010. The selected products are: Corn, soybean and wheat. The analysis of the dependency between extreme price values on the selected futures was based on the estimation of five models of two-dimensional extreme value copulas, namely, the Galambos copula, the Gumbel copula, the Husler–Reiss copula, the Tawn asymmetric copula and the t-EV copula. The next stage of the analysis was to test whether the structure of the dependency described with the estimated copulas is a sufficient approximation of reality, and whether it is suitable for modeling empirical data. The quality of matching the estimated copulas to empirical data of return rates of agricultural products was assessed. For this purpose, the Kendall coefficient was calculated, and the methodology of the empirical combining function was used. The conducted research allowed for the determination of the conduct for this kind of phenomena as it is crucial in the process of investing in derivatives markets. The analyzed phenomena are highly dependent on e.g., financial crises, war, or market speculation but also on drought, fires, rainfall, or even crop oversupply. The conducted analysis is of key importance in terms of balancing agricultural production on a global scale. It should be emphasized that conducting market analysis of agricultural products at the Chicago Mercantile Exchange in the context of competition with the agricultural market of the European Union is of significant importance.

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