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Separation and Hedging Results with State-Contingent Production

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  • Chambers, R.G.
  • Quiggin, J.

Abstract

A state-contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty. Producer behavior with both production and price risk, in the presence and in the absence of futures and forward markets, is analyzed in this state-contingent framework. Conditions for the optimal hedge to be positive or negative are derived. The authors also show that, under plausible conditions, a risk-averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a non-stochastic technology. New separation results, which hold in the presence of both price and production risk, are then developed. These separation results generalize Townsend's spanning results by reducing the number of necessary forward markets by one. Copyright 1997 by The London School of Economics and Political Science

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Bibliographic Info

Paper provided by Australian National University - Department of Economics in its series Papers with number 293.

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Length: 35 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:fth:aunaec:293

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Postal: THE AUSTRALIAN NATIONAL UNIVERSITY, DEPARTMENT OF ECONOMICS, RESEARCH SCHOOL of PACIFIC STUDIES, RESEARCH SCHOOL OF SOCIAL SCIENCES, G.P.O. 4, CANBERRA ACT 2601 AUSTRALIA..O. BOX 4 CANBERRA 2601 AUSTRALIA.
Web page: http://economics.anu.edu.au/economics.htm
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Keywords: FINANCIAL MARKET; INTERNATIONAL FINANCE; PRODUCTION; STOCK MARKET;

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Cited by:
  1. Quiggin, John C. & Chambers, Robert G., 2006. "The state-contingent approach to production under uncertainty," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), June.
  2. C.J. O'Donnell & W.E. Griffiths, 2004. "Estimating State-Contingent Production Frontiers," Department of Economics - Working Papers Series 911, The University of Melbourne.
  3. David A. Hennessy & Jutta Roosen, 2003. "Cost-Based Model of Seasonal Production, with Application to Milk Policy, A," Food and Agricultural Policy Research Institute (FAPRI) Publications 03-wp323, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  4. Quiggin, John & Chambers, Robert G, 2005. "The state-contingent approach to production and uncertainty," Risk and Sustainable Management Group Working Papers 151168, University of Queensland, School of Economics.
  5. Jaenicke, Edward C. & Larson, James A., 2001. "Production Risk Revisited In A Stochastic Frontier Framework: Evaluating Noise And Inefficiency In Cover Crop Systems," 2001 Annual meeting, August 5-8, Chicago, IL 20477, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Chambers, Robert G., 2006. "Some Empirical Implications of State-Contingent Production Models," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 137789, Australian Agricultural and Resource Economics Society.
  7. Wong, Kit Pong, 2006. "The effects of abandonment options on operating leverage and forward hedging," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 72-86.

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