Intertemporal Risk Management Decisions of Farmers under Preference, Market, and Policy Dynamics

This paper adapts a generalized expected utility (GEU) maximization model (Epstein and Zin, 1989 and 1991) to examine the intertemporal risk management of wheat producers in the Pacific Northwest. Optimization results based on simulated data indicate the feasibility of the GEU optimization as a modeling framework. It further extends the GEU model by incorporating a welfare measure, the certainty equivalent, to investigate the impacts of U.S. government programs and market institutions on farmers' risk management decisions and welfare. A comparison between the GEU and other expected utility models further implies GEU has the advantage of specifying farmers' intertemporal preferences separately and completely. Impact analysis results imply that farmers' optimal hedging is sensitive to changes in the preferences and the effects of these preference changes are intertwined. Target price and loan rate levels, offered by certain government payment programs, can lead to the substitution of government programs for hedging. The evaluation of current risk management tools shows both crop insurance and government payments can improve farmers' welfare significantly. Government payment programs have a greater effect on farmers' welfare than crop insurance and crop insurance outperforms hedging.generalized expected utility, risk management, multi-period production, dynamic optimization, intertemporal preference, market institution, government payments, Risk and Uncertainty, Q14, D9, C61,

The Impact of Hedging on Stock Return and Firm Value: New Evidence from Canadian Oil and Gas Companies

This paper analyzes the impact of hedging activities of large Canadian oil and gas companies on their stock returns and firm value. Differing from the existing literature this research finds that some of these relationships are nonlinear based on the framework of nonlinear generalized additive models. The research based on this more general methodology reveals some interesting findings on oil and gas hedging activities. The large Canadian oil and gas firms are able to use hedging to protect downside risk against the unfavorable oil and gas price changes. But oil hedging appears to be more effective in protecting stock returns than gas hedging is when downside risk presents. In addition, oil and gas reserves are more likely to play a positive (negative) role when the oil and gas prices are increasing (decreasing). Finally, hedging, in particular hedging on gas, together with profitability, investment and leverage, has certain impacts on firm value.oil; gas; hedging; return; firm value; general additive models ; Canada

INTERTEMPORAL DECISIONS OF FARMERS RISK MANAGEMENT: A DYNAMIC OPTIMIZATION WITH GENERALIZED EXPECTED UTILITY

In this paper we attempt an intertemporal study of risk management decisions for wheat growers in the Pacific Northwest. We apply a generalized expected utility model (GEU) to examine the farmers optimal choices of hedging ratios and crop insurance coverage levels in the presence of government payment programs in a multi-period production environment. A stochastic trend model is used to identify the long-term time series patterns of annual wheat yields, cash prices, and futures prices from two counties in Washington. The fitted models are then used as the base for yield and price simulation over the next five years. The stochastic dynamic optimization problem is solved numerically based on simulated data. The optimal solutions indicate that the GEU model is feasible in modeling farmers intertemporal decisions regarding risk management. The comparison between GEU model and some commonly used expected utility models further implies the advantage of the GEU model in being flexible to specify farmers intertemporal preferences separately and completely.Crop Production/Industries, Risk and Uncertainty,

Managing uncertainty:financial, actuarial and statistical modelling.

present value; Value; Actuarial;

Potential demand for hedging by Australian wheat producers

The potential for hedging Australian wheat with the new Sydney Futures Exchange wheat contract is examined using a theoretical hedging model parametised from previous studies. The optimal hedging ratio for an `average' wheat farmer was found to be zero under reasonable assumptions about transaction costs and based on previously published measures of risk aversion. The estimated optimal hedging ratios were found by simulation to be quite sensitive to assumptions about the degree of risk aversion. If farmers are significantly more risk averse than is currently believed, then there is likely to be an active interest in the new futures market.Crop Production/Industries, Marketing, Risk and Uncertainty,

Incompleteness in Insurance: An Analysis of the Multiplicative Case

Risk and Uncertainty,

Risk measurement with the equivalent utility principles.

Risk measures have been studied for several decades in the actuarial literature, where they appeared under the guise of premium calculation principles. Risk measures and properties that risk measures should satisfy have recently received considerable at- tention in the financial mathematics literature. Mathematically, a risk measure is a mapping from a class of random variables defined on some measurable space to the (extended) real line. Economically, a risk measure should capture the preferences of the decision-maker. In incomplete financial markets, prices are no more unique but depend on the agents' attitudes towards risk. This paper complements the study initiated in Denuit, Dhaene & Van Wouwe (1999) and considers several theories for decision under uncertainty: the classical expected utility paradigm, Yaari's dual approach, maximin expected utility theory, Choquet expected utility theory and Quiggin rank-dependent utility theory. Building on the actuarial equivalent utility pricing principle, broad classes of risk measures are generated, of which most classical risk measures appear to be particular cases. This approach shows that most risk measures studied recently in the financial literature disregard the utility concept (i.e. correspond to linear utilities), causing some deficiencies. Some alternatives proposed in the literature are discussed, based on exponential utilities.Actuarial; Coherence; Decision; Expected; Market; Markets; Measurement; Preference; Premium; Prices; Pricing; Principles; Random variables; Research; Risk; Risk measure; Risk measurement; Space; Studies; Theory; Uncertainty; Utilities; Variables;