A STUDY OF VOLATILITY IN THE AQUACULTURE MARKET USING VALUE-AT-RISK

Roy Endré Dahl*
University of Stavanger
roy.e.dahl@uis.no

Fisheries are in general a risky venture with uncertainty related to harvesting wild fish. For economics, fish price volatility can be described by price and production uncertainty. As shown in Dahl and Oglend (2014), seafood is a relatively volatile market, and according to their results, aquaculture products have a lower volatility compared to products from wild fish capture. This indicates that aquaculture production technique provides an opportunity to smooth supply according to demand.

This paper investigates this difference further by applying Value-at-Risk (VaR) when assessing the downside risk in fish market portfolios. Value at Risk (VaR) is one of the most commonly used methods to estimate portfolio risk for financial institutions. It defines the worst-case scenario within a certain confidence level over a specified time horizon. The estimate is dependent on the tail end of the portfolio distribution and its underlying risk factors.

The paper considers a set of fish prices from 01.1990 to 10.2012 using monthly trade data. The study differentiate between wild fish commodities and aquaculture commodities by assessing two portfolios and their VaR. Throughout our sample period, production levels from aquaculture has increased, as seen in Figure 1. In 1990, aquaculture production accounted for only 6% of total fish production, which increased to 31% in 2012 (in our sample).

The results show that while aquaculture products have a lower volatility, VaR has steadily increased since 1991. Figure 2 show how the portfolio of wild products have a 95% VaR of a 20% reduction in prices over 1-month, while a portfolio of aquaculture products have experienced an increase from 7% to 11%.