Modeling Yield Risk Under Technological Change: Dynamic Yield Distribution and the U.S Crop Insurance Program
AbstractThe objective of this study is to evaluate and model the yield risk associated with major agricultural commodities in the U.S. We are particularly concerned with the nonstationary nature of the yield distribution, which primarily arises because of technological progress and changing environmental conditions. Precise risk assessment depends on the accuracy of modeling this distribution. This problem becomes more challenging as the yield distribution changes over time, a condition that holds for nearly all major crops. A common approach to this problem is based on a two-stage method in which the yield is first detrended and then the estimated residuals are treated as observed data and modeled using various parametric or nonparametric methods. We propose an alternative parametric model that allows the moments of the yield distributions to change with time. Several model selection techniques suggest that the proposed time-varying model outperforms more conventional models in terms of in-sample goodness-of-fit, out-of-sample predictive power and the prediction accuracy of insurance premium rates.
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Bibliographic InfoPaper provided by Structure and Performance of Agriculture and Agri-products Industry (SPAA) in its series Working Papers with number 102048.
Date of creation: Jan 2011
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Web page: http://servsas.fsaa.ulaval.ca/index.php?id=12482&L=1
Crop Insurance; Model Comparison; Time-Varying Distribution; Financial Economics;
Other versions of this item:
- Zhu, Ying & Goodwin, Barry K. & Ghosh, Sujit K., 2011. "Modeling Yield Risk Under Technological Change: Dynamic Yield Distributions and the U.S. Crop Insurance Program," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(1), April.
- NEP-AGR-2011-05-14 (Agricultural Economics)
- NEP-ALL-2011-05-14 (All new papers)
- NEP-IAS-2011-05-14 (Insurance Economics)
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