nep-rmg New Economics Papers
on Risk Management
Issue of 2011‒05‒24
nine papers chosen by
Stan Miles
Thompson Rivers University

  1. Risk Rating of FSAâs Guaranteed Loan Portfolio By Dodson, Charles B.
  2. Modeling Temperature Dynamics for Aquaculture Index Insurance In Taiwan: A Nonlinear Quantile Approach By Chen, Shu-Ling
  3. Modeling Agricultural Risk, Risk Preferences and Perceptions By Guan, Zhengfei; Wu, Feng
  4. Application of Weather Derivatives in Multi-Period Risk Management By Vedenov, Dmitry V.; Sanchez, Leonardo
  5. An Assessment of the Interaction between High Tunnels and Crop Insurance for Specialty Crop Producers By Belasco, Eric; Chen, Chen; Ponnaluru, Srinivasa Sasdhar; Galinato, Suzette P.; Marsh, Thomas L.
  6. Pricing Options on Commodity Futures: The Role of Weather and Storage By Bozic, Marin; Fortenbery, T. Randall
  7. Applications of copulas to Analysis of Efficiency of Weather Derivatives as Primary Crop Insurance Instruments By Filonov, Vitaly; Vedenov, Dmitry V.
  8. Volatility Spillovers in Agricultural Commodity Markets: An Application Involving Implied Volatilities from Options Markets By Zhao, Jieyuan; Goodwin, Barry K.
  9. Management of chemical and biological risks in agri-food chain By Bachev, Hrabrin

  1. By: Dodson, Charles B.
    Keywords: Risk and Uncertainty,
    Date: 2010–07
  2. By: Chen, Shu-Ling
    Abstract: According to the Taiwan Council of Agriculture, frost was responsible for approximately 30 percent of aquaculture losses in Taiwan during the period 1999-2008. Farmed milkfish, the most important aquaculture crop in Taiwan, is particularly sensitive to temperature variations, and can experience widespread kills whenever temperatures fall below 14°C for sustained periods of time. Temperatures below this critical minimum, however, are not uncommon during the January-March winter months. The purpose of our study is to analyze the possible benefits and the actuarial properties of temperature-based index insurance for the farmed milkfish industry in Kaohsiung County, Taiwan. Weather-based index insurance has been promoted as a cost-effective means of managing risk associated with catastrophic weather events, examples of which include risk transfer products as varied as rainfall insurance in Mali and El Nino-Southern Oscillation insurance in Peru. Of special interest here will be performing accurate assessments of the actuarial properties of a temperature index contract that would indemnify Kaohsiung County farmed milkfish producers based on the value of lower-quadrant daily temperature, which has been shown to be highly correlated with extreme production losses. To assess the actuarial properties of such a contract, we will develop a time series model of daily temperatures lows in Kaohsiung County. Daily temperatures exhibit some special features that must be observed by any reasonable time series model. For example, daily temperatures exhibit strong seasonality with small perturbations. Moreover, seasonal variations exist not only with the mean daily temperatures, but also their variance. Specifically, daily low temperatures are more volatile in winter than in summer. To capture the special features of daily temperatures, we estimate a nonlinear nonstructural time series model of the quantiles of the conditional distribution of daily temperature lows given the observed covariates based on Campbell and Diebold (2005). A simple low-ordered polynomial function is used to capture the deterministic trend and autoregressive lags are used to capture cyclical dynamics of the daily temperature. Also, a Fourier series is applied to model the seasonal components in daily temperature and its variance. However, in contrast to Campbell and Diebold (2005), we model and forecast the lower quantile rather than mean of the daily temperature. We also introduce a phase angle in the low-order Fourier series to allow the peak of daily average temperature to occur at any point in time within a year. The algorithm for computing the nonlinear quantile regression estimates is based on an interior point method described in Koenker and Park (1996). Once the estimates are computed, we invoke bootstrap methods to compute confidence intervals for the contractâs fair premium rate. Our research employs 1974-2008 daily surface temperature data, which is collected and published by Central Bureau, Taiwan, for a weather station located in Kaohsiung County. The farmed milkfish production data in Kaohsiung County also obtained from Council of Agriculture, Executive Yuan, is used to examine the risk-reduction effectiveness of the temperature contracts with different trigger and stop-loss points. The contribution of our paper is not only to provide an alternative method in modeling temperature risk, but also to provide an empirical basis for further, more general discussion regarding the potential benefits of weather index insurance contracts in Taiwan.
    Keywords: nonlinear quantile, temperature risk, weather index insurance, Agricultural Finance, Financial Economics, Risk and Uncertainty,
    Date: 2011
  3. By: Guan, Zhengfei; Wu, Feng
    Keywords: Risk and Uncertainty,
    Date: 2011
  4. By: Vedenov, Dmitry V.; Sanchez, Leonardo
    Abstract: This work is a first attempt to analyze the effect of weather derivative availability on the risk management strategies in a multi-period setting, when crop activities take place twice a year. Rice production in Ecuador is used as a case study. Numerical solutions show farmers improve their well-being by reducing their risk exposure.
    Keywords: Weather Derivatives, Risk Management, Multi-Period., Agribusiness, Agricultural Finance, Risk and Uncertainty, Q13, Q14,
    Date: 2011
  5. By: Belasco, Eric; Chen, Chen; Ponnaluru, Srinivasa Sasdhar; Galinato, Suzette P.; Marsh, Thomas L.
    Abstract: Protective covers, such as high tunnels, are being used by specialty crop producers to enhance production quality and yields, expand or growing seasons, and protect crops from some extreme elements. While growing in popularity, one barrier to larger utilization includes the uncertainty regarding their practices and benefits. This paper recognizes that high tunnels can be used as a form of risk management and examines the relationship with crop insurance in order to better define optimal risk management strategies.
    Keywords: high tunnels, specialty crop insurance, risk management, Production Economics,
    Date: 2011
  6. By: Bozic, Marin; Fortenbery, T. Randall
    Abstract: Options on agricultural futures are popular financial instruments used for agricultural price risk management and to speculate on future price movements. Poor performance of Blackâs classical option pricing model has stimulated many researchers to introduce pricing models that are more consistent with observed option premiums. However, most models are motivated solely from the standpoint of the time series properties of futures prices and need for improvements in forecasting and hedging performance. In this paper we propose a novel arbitrage pricing model motivated from the economic theory of optimal storage, and consistent with implications of plant physiology on the importance of weather stress. We introduce a pricing model for options on futures based on a Generalized Lambda Distribution (GLD) that allows greater flexibility in higher moments of the expected terminal distribution of futures price. We use times and sales data for corn futures and options for the period 1995-2009 to estimate the implied skewness parameter separately for each trading day. An economic explanation is then presented for inter-year variations in implied skewness based on the theory of storage. After controlling for changes in planned acreage, we find a statistically significant negative relationship between ending stocks-to-use and implied skewness, as predicted by the theory of storage. Furthermore, intra-year dynamics of implied skewness reflect the fact that resolution of uncertainty in corn supply is resolved between late June and middle of October, i.e. during corn growth phases that encompass corn silking through grain maturity. Impacts of storage and weather on the distribution of terminal futures price jointly explain upward sloping implied volatility curves.
    Keywords: arbitrage pricing model, options on futures, generalized lambda distribution, theory of storage, skewness, Agribusiness, Agricultural Finance, Crop Production/Industries, Financial Economics, Research Methods/ Statistical Methods, Risk and Uncertainty, G13, Q11, Q14,
    Date: 2011–05–03
  7. By: Filonov, Vitaly; Vedenov, Dmitry V.
    Keywords: Risk and Uncertainty,
    Date: 2011
  8. By: Zhao, Jieyuan; Goodwin, Barry K.
    Abstract: This paper discusses the volatility spillover effects in agricultural commodity markets, via studying implied volatilities derived from nearby options contracts. Using weekly averaged data from corn and soybean markets after 2003, a vector autoregressive (VAR) model is estimated, and impulse response functions are used to discuss the volatility spillover effects. A bootstrap version of Chow forecast tests also suggests a structural change around the first quarter of 2008.
    Keywords: Volatility Spillovers, Implied Volatility, Structural Change, Risk and Uncertainty,
    Date: 2011
  9. By: Bachev, Hrabrin
    Abstract: Paper presents diverse modes of governance of chemical and biological risks in agri-food sector, assesses their efficiency, complementarities, and challenges, and suggests recommendations for public policies improvement. It defines governance as system of social order responsible for particular behavior of agents; specify various (institutions, market, private, public) mechanisms of risk governance and (natural, technological, behavioral etc.) factors of efficiency; and suggest a framework for analysis and improvement of risk governance. New opportunities for risks governance relate to: modernization of technologies and institutional environment; specialization, concentration, and integration; “willingness to pay” and consumers and media involvement; national and transnational cooperation. Risk management challenges are associated with: new threats and risks; separation of risk-creation from risk-taking; vulnerability of mass production, distribution and consumption; high adaptation and compliance costs; unequal norms, implementing capability, policies and private strategies; public failures; and informal sector. Policies improvement is to incorporate governance issues taking into account type of threats and risks, specific factors, and comparative benefits and cost (including third-party, transacting, time); employ more hybrid modes introducing and enforcing new rights, and supporting private and collective initiatives; give greater support to multidisciplinary and interdisciplinary research on factors, modes, and impacts of risk-governance.
    Keywords: risk management; market; private; public governance; agri-food chain
    JEL: L11 D81 O13 Q12 Q18 L14 D23 O17 Q17 Q13 L23 L22
    Date: 2011–05–01

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