Quantifying Gains To Risk Diversification Using Certainty Equivalence In A Mean-Variance Model: An Application To Florida Citrus

1990 ◽  
Vol 22 (2) ◽  
pp. 191-197 ◽  
Author(s):  
Allen M. Featherstone ◽  
Charles B. Moss
Keyword(s):  
Risk Aversion ◽  
Risk Averse ◽  
Fixed Costs ◽  
Variance Model ◽  
Marginal Benefit ◽  
Certainty Equivalence ◽  
Risk Diversification ◽  
Certainty Equivalents ◽  
Florida Citrus ◽  
Mean Variance

Abstract The marginal benefit and cost of diversification for Florida orange producers is analyzed using certainty equivalents. Results indicate that for moderate and high levels of risk aversion, diversification into strawberry, grapefruit, or additional orange production is not optimal. However, moderately risk averse Florida orange producers can gain by diversifying into grapefruit production if the annual amortized fixed costs can be reduced by as little as 10 percent.

scholarly journals Market-based instruments for risk-averse farmers: rubber agroforest conservation in Jambi Province, Indonesia

2016 ◽  
Vol 22 (2) ◽  
pp. 133-155 ◽  
Author(s):  
Utkur Djanibekov ◽  
Grace B. Villamor
Keyword(s):  
Income Inequality ◽  
Risk Aversion ◽  
Real Options ◽  
Risk Averse ◽  
Variance Model ◽  
Income Uncertainty ◽  
Real Options Approach ◽  
Pigovian Taxes ◽  
Rubber Agroforest ◽  
Mean Variance

AbstractThis paper investigates the effectiveness of different market-based instruments (MBIs), such as eco-certification premiums, carbon payments, Pigovian taxes and their combination, to address the conversion of agroforests to monoculture systems and subsequent effects on incomes of risk-averse farmers under income uncertainty in Indonesia. For these, the authors develop a farm-level dynamic mean-variance model combined with a real options approach. Findings show that the conservation of agroforest is responsive to the risk-aversion level of farmers: the greater the level of risk aversion, the greater is the conserved area of agroforest. However, for all risk-averse farmers, additional incentives in the form of MBIs are still needed to prevent conversion of agroforest over the years, and only the combination of MBIs can achieve this target. Implementing fixed MBIs also contributes to stabilizing farmers’ incomes and reducing income risks. Consequently, the combined MBIs increase incomes and reduce income inequality between hardly and extremely risk-averse farmers.

Eliciting Risk Preferences and Elasticity of Substitution

2020 ◽  
Vol 17 (4) ◽  
pp. 314-329
Author(s):  
Johan Burgaard ◽  
Mogens Steffensen
Keyword(s):  
Risk Aversion ◽  
Discount Rate ◽  
Predictive Power ◽  
Recursive Utility ◽  
Risk Averse ◽  
Indirect Utility ◽  
Consistent Estimation ◽  
On Certainty ◽  
Certainty Equivalents ◽  
Elasticity Of Intertemporal Substitution

Risk aversion and elasticity of intertemporal substitution (EIS) are separated via the celebrated recursive utility building on certainty equivalents of indirect utility. Based on an alternative separation method, we formulate a questionnaire for simultaneous and consistent estimation of risk aversion, subjective discount rate, and EIS. From a representative group of 1,153 respondents, we estimate parameters for these preferences and their variability within the population. Risk aversion and the subjective discount rate are found to be in the orders of 2 and 0, respectively, not diverging far away from results from other studies. Our estimate of EIS in the order of 10 is larger than often reported. Background variables like age and income have little predictive power for the three estimates. Only gender has a significant influence on risk aversion in the usually perceived direction that females are more risk-averse than males. Using individual estimates of preference parameters, we find covariance between preferences toward risk and EIS. We present the background reasoning on objectives, the questionnaire, a statistical analysis of the results, and economic interpretations of these, including relations to the literature.

scholarly journals AN ECONOMIC RISK ANALYSIS OF WEED-SUPPRESSIVE RICE CULTIVARS IN CONVENTIONAL RICE PRODUCTION

2018 ◽  
Vol 50 (4) ◽  
pp. 478-502 ◽  
Author(s):  
K. BRADLEY WATKINS ◽  
DAVID R. GEALY ◽  
MERLE M. ANDERS ◽  
RANJITSINH U. MANE
Keyword(s):  
Risk Analysis ◽  
Risk Aversion ◽  
Absolute Risk ◽  
Rice Production ◽  
Risk Averse ◽  
Rice Cultivars ◽  
Economic Risk ◽  
Absolute Risk Aversion ◽  
Certainty Equivalents

AbstractWeed-suppressive rice cultivars have the potential to reduce heavy reliance on synthetic herbicides in rice production. However, the economics of using weed-suppressive rice cultivars in conventional rice systems have not been fully evaluated. This study uses simulation and stochastic efficiency with respect to a function to rank weed-suppressive and weed-nonsuppressive rice cultivars under alternative herbicide intensity levels based on their certainty equivalents mapped across increasing levels of absolute risk aversion. The results indicate risk-averse rice producers would prefer to grow weed-suppressive cultivars using less herbicide inputs than what would be used to grow weed-nonsuppressive rice cultivars.

scholarly journals Input Demand Under Joint Energy and Output Prices Uncertainties

2017 ◽  
Vol 34 (04) ◽  
pp. 1750018 ◽  
Author(s):  
Moawia Alghalith ◽  
Xu Guo ◽  
Cuizhen Niu ◽  
Wing-Keung Wong
Keyword(s):  
Risk Aversion ◽  
Absolute Risk ◽  
Comparative Statics ◽  
Energy Price ◽  
Risk Averse ◽  
Absolute Risk Aversion ◽  
Output Price ◽  
Input Demand ◽  
Mean Variance

In this paper, we analyze the impacts of joint energy and output prices uncertainties on the input demands in a mean–variance framework. We find that an increase in expected output price will surely cause the risk-averse firm to increase the input demand, while an increase in expected energy price will surely cause the risk-averse firm to decrease the demand for energy, but increase the demand for the non-risky inputs. Furthermore, we investigate the two cases with only uncertain energy price and only uncertain output price. In the case with only uncertain energy price, we find that the uncertain energy price has no impact on the demands for the non-risky inputs. We also show that the concepts of elasticity and decreasing absolute risk aversion (DARA) play an important role in the comparative statics analysis.

scholarly journals The Analysis of Portfolio Risk Management using VAR Approach Based on Investor Risk Preference

KINERJA ◽  
2017 ◽  
Vol 21 (2) ◽  
pp. 129 ◽  
Author(s):  
Agus Suwarno ◽  
Putu Anom Mahadwartha
Keyword(s):  
Value At Risk ◽  
Risk Preference ◽  
Risk Averse ◽  
Portfolio Risk ◽  
Variance Model ◽  
Single Index ◽  
Index Model ◽  
Single Index Model ◽  
Risk Taker ◽  
Mean Variance

Ackert and Deaves (2010) said that most people have tendency to being risk averse, but with appropriate amount of compensation, people may take more risk. Understanding those circumstances, this research trying to figure risk involved in a Mean-Variance Model. This model has taken consideration about investor risk preference in composed VAR model. VAR define as a measure of the risk of investments, which in this research focuses on risk preferences. This research also conducts comparison between optimum portfolio model known as Single Index Model and Mean-Variance Mode. Robustness test taken too analyze the outcomes from different data input. Research showed that risk preference has an impact on generating portfolio based on Mean-Variance Mode (MVM). Meanwhile, Single Index Model (SIM) found to given a similar result as MVM in high risk preference. This has shown that SIM may not adequate for those who have low risk preference. Research also show that risk taker investor get more gain and endure more risk than risk averse investor. But, based on robustness test, we found that the lowest risk an investor bear is on the highest risk preference. Thus, we make a conclusion that variance is not the only factor that might cause VaR increased, data dispersion has became more major factor.Keywords: Value at risk, Single Index Model, Optimum Portfolio.

scholarly journals OPTIMAL OUTCOME SHARING WITH A CONSORTIUM OF CONTRACTORS

2015 ◽  
Vol 22 (5) ◽  
pp. 655-665 ◽  
Author(s):  
S. Mahdi HOSSEINIAN ◽  
David G. CARMICHAEL
Keyword(s):  
Risk Aversion ◽  
Risk Attitude ◽  
Risk Averse ◽  
Optimal Outcome ◽  
Original Solution ◽  
Project Outcome ◽  
Risk Neutral ◽  
Current Practices

Where a consortium of contractors is involved, there exist no guidelines in the literature on what the outcome sharing arrangement should be. The paper addresses this shortfall. It derives the optimal outcome sharing arrangement for risk-neutral and risk-averse contractors within the consortium, and between the consortium and a risk-neutral owner. Practitioners were engaged in a designed exercise in order to validate the paper’s propositions. The paper demonstrates that, at the optimum: the proportion of outcome sharing among contractors with the same risk-attitude should reflect the levels of their contributions; the proportion of outcome sharing among contractors with the same level of contribu­tion should be lower for contractors with higher levels of risk aversion; a consortium of risk-neutral contractors should receive or bear any favourable or adverse project outcome respectively; and the proportion of outcome sharing to a con­sortium of risk-averse contractors should reduce, and the fixed component of the consortium fee should increase, when the contractors become more risk-averse or the level of the project outcome uncertainty increases. The paper proposes an original solution to the optimal sharing problem in contracts with a consortium of contractors, thereby contributing to current practices in contracts management.

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