Search results
1 – 10 of over 1000Wenwen Xi, Dermot Hayes and Sergio Horacio Lence
The purpose of this paper is to study the variance risk premium in corn and soybean markets, where the variance risk premium is defined as the difference between the historical…
Abstract
Purpose
The purpose of this paper is to study the variance risk premium in corn and soybean markets, where the variance risk premium is defined as the difference between the historical realized variance and the corresponding risk-neutral expected variance.
Design/methodology/approach
The authors compute variance risk premiums using historical derivatives data. The authors use regression analysis and time series econometrics methods, including EGARCH and the Kalman filter, to analyze variance risk premiums.
Findings
There are moderate commonalities in variance within the agricultural sector, but fairly weak commonalities between the agricultural and the equity sectors. Corn and soybean variance risk premia in dollar terms are time-varying and correlated with the risk-neutral expected variance. In contrast, agricultural commodity variance risk premia in log return terms are more likely to be constant and less correlated with the log risk-neutral expected variance. Variance and price (return) risk premia in agricultural markets are weakly correlated, and the correlation depends on the sign of the returns in the underlying commodity.
Practical implications
Commodity variance (i.e. volatility) risk cannot be hedged using futures markets. The results have practical implications for US crop insurance programs because the implied volatilities from the relevant options markets are used to estimate the price volatility factors used to generate premia for revenue insurance products such as “Revenue Protection” and “Revenue Protection with Harvest Price Exclusion.” The variance risk premia found implies that revenue insurance premia are overpriced.
Originality/value
The empirical results suggest that the implied volatilities in corn and soybean futures market overestimate true expected volatility by approximately 15 percent. This has implications for derivative products, such as revenue insurance, that use these implied volatilities to calculate fair premia.
Details
Keywords
Shyam Adhikari, Eric J. Belasco and Thomas O. Knight
The purpose of this paper is to examine the spatial components of producer heterogeneity in crop insurance product selection among US corn producers and identifies neighborhood…
Abstract
Purpose
The purpose of this paper is to examine the spatial components of producer heterogeneity in crop insurance product selection among US corn producers and identifies neighborhood spillover or agent marketing effects in these decisions.
Design/methodology/approach
County‐level insurance and yield data are used to demonstrate that a gradual shift from yield‐based insurance to revenue‐based insurance has spatial patterns. Conventional risk variables such as yield variability, price variability, prevalence of irrigation, other crops, and yield‐price relationships play an important role in this shift and are consistently estimated only when spatial components are included. A spatial random effects model is used to also identify the impact of spatial lag effects, which include neighborhood spillover and agent marketing effects, on the share of corn acres insured with revenue‐based plans vs yield‐based plans.
Findings
Theoretically consistent variables associated with risk are found to significantly influence the choice between crop revenue and yield insurance. Non‐linear parameters identify the region‐specific effects from changes in irrigation, yield price correlation, and the prevalence of corn production on insurance decisions. In addition, spatial components such as the decisions made by nearby producers and marketing drives are also found to influence decisions. These results may demonstrate the relative influence of trusted sources, such as nearby producers and insurance agents, on insurance decisions.
Originality/value
Traditional risk variables are consistently estimated by controlling for spatial heterogeneity. This study also reveals the propensity of producers to rely on the opinions of other producers or agents that they know.
Details
Keywords
The federal crop insurance program has become the cornerstone of US agricultural policy. Since its introduction in the mid-1990s, crop revenue insurance has grown in prominence…
Abstract
Purpose
The federal crop insurance program has become the cornerstone of US agricultural policy. Since its introduction in the mid-1990s, crop revenue insurance has grown in prominence and now represents nearly 90 percent of liability for major crops. The pricing and design of revenue insurance raises a number of important challenges. The 2014 Farm Bill brought about several important changes in the program, resulting in a moving target for analysts and researchers. The paper aims to discuss these issues.
Design/methodology/approach
The risks are of a multivariate nature and are likely to be highly dependent on one another. The crop insurance setting is also constantly changing, with technological changes in production practices and highly volatile commodity prices. Compounding these challenges is the fact that US policymakers continually change the program.
Findings
The program has indeed undergone many changes and a number of important research questions need to be addressed.
Originality/value
Original research based upon recent policy.
Details
Keywords
Minghua Ye, Rongming Wang, Guozhu Tuo and Tongjiang Wang
The purpose of this paper is to demonstrate how crop price insurance premium can be calculated using an option pricing model and how insurers can transfer underwriting risks in…
Abstract
Purpose
The purpose of this paper is to demonstrate how crop price insurance premium can be calculated using an option pricing model and how insurers can transfer underwriting risks in the futures market.
Design/methodology/approach
Based on data from spot and futures market in China, this paper develops an improved B-S model for the calculation of crop price insurance premium and tests the possibility of hedging underwriting risks by insurance firms in the futures market.
Findings
The authors find that spot price of crops in China can be estimated with agricultural commodity futures prices, and can be taken as the insured price for crop price insurance. The authors also find that improved B-S model yields better estimation of crop price insurance premium than traditional B-S model when spot price does not follow geometric Brownian motion. Finally, the authors find that hedging can be one good alternative for insurance firms to manage underwriting risks.
Originality/value
This paper develops an improved B-S model that is data-driven in nature. Insured price of the crop price insurance, or the exercise price used in the B-S model, is estimated from a co-integration model built on spot and futures market price series. Meanwhile, distributional patterns of spot price series, one important factor determining the applicability of B-S model, is factored into the improved B-S model so that the latter is more robust and friendly to data with varied distributions. This paper also verifies the possibility of hedging of underwriting risks by insurance firms in the futures market.
Details
Keywords
Xuan Liu, G. Cornelis van Kooten, Eric Martin Gerbrandt and Jun Duan
The authors investigate whether an index-based weather insurance (WII) product can complement or replace existing traditional crop yield insurance for mitigating farmers'…
Abstract
Purpose
The authors investigate whether an index-based weather insurance (WII) product can complement or replace existing traditional crop yield insurance for mitigating farmers' financial risks, with an application to blueberry growers in British Columbia (BC).
Design/methodology/approach
A hybrid model combining expected utility (EU) and prospect values is developed to analyse farmers' demand for WII.
Findings
While weather data are used to investigate supply elements, a hybrid model combining EU theory and prospect theory (PT) is developed to analyse farmers' demand for WII. On the supply side, a quality index is constructed and the relationship between the quality index and key weather parameters is quantified using a partial least squares structural model. The authors then model weather parameters via time-series analysis and statistical distributions to provide reasonable estimates for calculating actuarially sound insurance premiums for a rainfall indexed, insurance product. This model indicates that decreases in the proportion of a blueberry grower's total revenue and revenue volatility will decrease the possibility that they participate in WII. At the same time, an increase in the value loss aversion coefficient and WII's basis risk further leads to less demand for WII. In short, a grower may decide not to participate in WII at an actuarially fair premium due to the combined effects of the above factors. Overall, while the supply analysis enables us to demonstrate that WII can potentially help in mitigating farmers' financial risks, it turns out that, on the demand side, blueberry growers are unwilling to pay for such a product without large government subsidies.
Originality/value
The authors argue that the demand for insurance may be affected by the level and the volatility of a berry grower's total revenue. Hence, the authors propose a hybrid expression that assumes a farmer seeks to maximize the total utility function to capture the rational and intuitive parts of a farmer's decision-making process. The EU represents rationality and the prospect value represents the intuitive component. Meanwhile, the authors investigate the possibility of using key weather parameters to construct a berry quality index – one that could be applied to other agricultural areas for studying the relationship between weather conditions and product quality.
Details
Keywords
Adishwar K. Jain and Raymond A.K. Cox
The purpose of this paper is to examine the uncertainty of acquiring the lowest possible airfare when contemplating the purchase of a ticket. A real option model is applied to…
Abstract
Purpose
The purpose of this paper is to examine the uncertainty of acquiring the lowest possible airfare when contemplating the purchase of a ticket. A real option model is applied to value insurance contracts that could be offered to passengers to cope with price risk. Furthermore, the premiums charged for such airfare price insurance contracts can augment airline carrier revenues.
Design/methodology/approach
Prices on 14 airfares were collected for 79 consecutive days on an assortment of US domestic and international flights from four airline carriers. Volatility in airfares was shown using the price range and SD. The Black‐Scholes‐Merton model was employed to value the call and put options representing different airfare price insurance contracts.
Findings
Airfare price insurance contracts affordability was demonstrated ranging from 1.55 to 11.28 percent of the average dollar ticket price.
Research limitations/implications
The valuations in the paper were based on ex post data that would not be available to the customer purchaser. Nonetheless, the airline carriers that sell the insurance would have better estimates of the price volatility and therefore could price the contracts to make a profit.
Practical implications
Airline passengers would have an opportunity to reduce the ticket price risk they face when buying their tickets. Airline carrier could increase revenues by offering such products.
Social implications
The opportunity to manage price risk contributes to the completeness of markets.
Originality/value
The paper shows that airfare price insurance contracts are a viable tool in the management of price risk.
Details
Keywords
– The purpose of this paper is to determine the sources and factors affecting farm revenue variation on crop and livestock farms in the Northern Great Plains.
Abstract
Purpose
The purpose of this paper is to determine the sources and factors affecting farm revenue variation on crop and livestock farms in the Northern Great Plains.
Design/methodology/approach
A two method approach is used. Variance decomposition analysis is completed on an 18-year balanced panel data set of North Dakota producers to determine the sources of farm revenue variation. The second component of this research uses a random effects estimator to determine the effect of farm characteristics on farm revenue variation measured by coefficient of variation.
Findings
Crop revenue is the largest source of farm revenue variation, with crop insurance being the largest source of revenue variation diversification. Small market crops and corn were found to increase revenue variation compared to those operations that received the largest sum of their revenue from wheat. Government payments and insurance payments were also found to increase farm revenue variation indicating they may provide an incentive to plant more risky crops.
Originality/value
This analysis examined specific enterprises that affect farm revenue variation, which has not been examined in earlier work. This distinction allows for focus on potential policy implications of small market crops and new crops in “transitional planting zones”.
Details
Keywords
Kenneth Poon and Alfons Weersink
The purpose of this paper is to examine the factors affecting the relative variability in farm and off‐farm income for Canadian farm operators.
Abstract
Purpose
The purpose of this paper is to examine the factors affecting the relative variability in farm and off‐farm income for Canadian farm operators.
Design/methodology/approach
Variability of farm and off‐farm income is analyzed using a dataset of 17,000 farm operators from 2001 to 2006. Relative ranking of the coefficients of variation (CV) for farm and off‐farm income are compared across farm types and are regressed against factors conditioning the variations.
Findings
Greater reliance on farm income results in lower (greater) relative variability in farm (off‐farm) income. Larger commercial operations experience larger farm income volatility because they are less risk averse or they can manage more risk. Diversification and off‐farm employment appear to be risk management strategies for commercial operations.
Research limitations/implications
Government payments have a small, positive effect on farm and off‐farm income variability, indicating this support leads farmers to take on more risky activities and/or reduce the use of self‐insurance activities. Results could also be due to the lag between the time of the income reduction and the time in which the aid is received. Further research is necessary to decipher the effects of government support on farm decisions.
Practical implications
The results on relative variation in the farm and off‐farm income across farm type raises questions about whether government programs should target specific operations.
Originality/value
While income variation remains a focus of public policy, factors affecting its variability are not well‐understood. Studies have examined the level of farm income and the decision to participate in off‐farm employment but none has examined the variance in both income sources.
Details
Keywords
Nicholas D. Paulson, Gary D. Schnitkey and Bruce J. Sherrick
This study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions.
Abstract
Purpose
This study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions.
Design/methodology/approach
The analysis is conducted in an Illinois corn‐soybean setting in which optimal marketing and crop insurance decisions are estimated for a risk‐averse producer under typical cash rent and share rent agreements using numerical simulation methods.
Findings
Results indicate that the availability of crop insurance impacts the intensity of use of put options under both cash and share rent arrangements. Similar to previous work in this area, revenue insurance is found to cause a substitution away from marketing using put options, while yield insurance is complementary to price risk management alternatives. However, while insurance and marketing play a role under both types of land tenure arrangements, shifting from a cash rent to a share rent agreement provides a relatively greater degree of risk reduction.
Practical implications
The results suggest that additional research is needed to explain trends in land rental contracts. Crop insurance and other federal programs may provide incentives to switch from share leases to cash rent arrangements. Changes to the design of these programs could facilitate risk management for producers more efficiently.
Originality/value
The unique contribution of this study is the comparison of insurance and marketing decisions under both cash rent and share rent agreements for crop land.
Details
Keywords
Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some…
Abstract
Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some legal aspects concerning MNEs, cyberspace and e‐commerce as the means of expression of the digital economy. The whole effort of the author is focused on the examination of various aspects of MNEs and their impact upon globalisation and vice versa and how and if we are moving towards a global digital economy.
Details