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Modelling farm production risk with copulae instead of correlations

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  • Schulte-Geers, Matthias
  • Berg, Ernst
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    Abstract

    The optimisation of production plans is an important topic in agriculture, often related to diversification and specialisation as the classical instruments of coping with production risk. Although the measurement of embedded risk is often inaccurate, it is nevertheless necessary for decision making to describe the common behaviour of different variables in a model. Imprecisely defined relationships influence the “right” choice, why it is important to find a good approximation of the real circumstances. In financial science, copula functions are frequently used instead of correlation coefficients to model joint price behaviour, because of the possibility to link the marginal distributions on multifarious ways. By now, agricultural science makes less use of this method. This research uses the concept of “partly nested Archimedean copula” to model the relationship between different crop yields and compares it with a correlation based approach. The analysis focuses the differences of the approaches in the context of production planning and the use of weather derivatives.

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    File URL: http://purl.umn.edu/115996
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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 115996.

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    Date of creation: 02 Sep 2011
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    Handle: RePEc:ags:eaae11:115996

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    Keywords: Copula; risk; weather derivatives; Risk and Uncertainty;

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    1. Liu, Xiaoliang & Xu, Wei & Odening, Martin, 2010. "Lassen Sich Ertragsrisiken In Der Landwirtschaft Global Diversifizieren?," 50st Annual Conference, Braunschweig, Germany, September 29-October 1, 2010 93955, German Association of Agricultural Economists (GEWISOLA).
    2. Hirschauer, Norbert & Musshoff, Oliver, 2008. "Risikomanagementinstrumente Im Vergleich: Sollte Man Landwirtschaftliche Ernteversicherungen Subventionieren? – Gute Alte Argumente In Einem Neuen Streit," 48th Annual Conference, Bonn, Germany, September 24-26, 2008 52657, German Association of Agricultural Economists (GEWISOLA).
    3. Bokusheva, Raushan, 2010. "Measuring the dependence structure between yield and weather variables," MPRA Paper 22786, University Library of Munich, Germany.
    4. Xu, Wei & Filler, Gunther & Odening, Martin & Okhrin, Ostap, 2009. "On the Systemic Nature of Weather Risk," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49131, Agricultural and Applied Economics Association.
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