Investing in Portfolio With Grains or Softs?—Extreme Risk Analysis With Non‐Normal VaR Models and Omega Ratio

ABSTRACT Agricultural markets have faced significant fluctuations in recent years, due to the COVID‐19 and the war in Ukraine. Two six‐asset portfolios are constructed, consisting of grains and softs commodities, to evaluate which portfolio has a lower level of extreme risk and a more favorable return‐to‐risk ratio. Extreme risk is assessed using parametric Value‐at‐Risk models, including the traditional normal VaR and three alternative non‐normal VaR models—logistic, hyper‐secant, and Laplace. The Omega ratio evaluates return‐to‐risk performance. In the precrisis period, the grains portfolio is found to be less vulnerable to extreme risks as grain commodities exhibit lower risk profiles. Conversely, during the crisis period, the softs portfolio demonstrates reduced exposure to extreme risks, attributed to the lower integration of soft markets. The grains portfolio shows a higher Omega across the first three threshold levels before the crisis. However, during the crisis, the Omega ratio for softs substantially surpasses that of grains.