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Evolution of Subjective Hurricane Risk Perceptions: A Bayesian Approach

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Author Info
David Kelly () (Department of Economics, University of Miami)
David Letson () (Rosenstiel School of Marine and Atmospheric Science, University of Miami)
Forest Nelson () (Department of Economics, Henry B. Tippie College of Business Administration, University of Iowa)
David S. Nolan () (Rosenstiel School of Marine and Atmospheric Science, University of Miami)
Daniel Solis () (Rosenstiel School of Marine and Atmospheric Science, University of Miami)

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Abstract

This paper studies how individuals update subjective risk perceptions in response to hurricane track forecast information, using a unique data set from an event market, the Hurricane Futures Market (HFM). We derive a theoretical Bayesian framework which predicts how traders update their perceptions of the probability of a hurricane making landfall in a certain range of coastline. Our results suggest that traders behave in a way consistent with Bayesian updating but this behavior is based on the perceived quality of the information received.

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File URL: http://www.bus.miami.edu/_assets/files/faculty-and-research/academic-departments/eco/eco-working-papers/wp2009-05-kelly-hfm3_1_09.pdf
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File Function: First version, 2009
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Publisher Info
Paper provided by University of Miami, Department of Economics in its series Working Papers with number 0905.

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Length: 42 pages
Date of creation: 27 Feb 2009
Date of revision:
Handle: RePEc:mia:wpaper:0905

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Related research
Keywords: risk perceptions; learning; Bayesian learning; event markets; prediction markets; favorite-longshot bias; hurricanes;

Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
C9 - Mathematical and Quantitative Methods - - Design of Experiments

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Felix Oberholzer-Gee & Miki Mitsunari, 2006. "Information regulation: Do the victims of externalities pay attention?," Journal of Regulatory Economics, Springer, vol. 30(2), pages 141-158, 08. [Downloadable!] (restricted)
  2. Silvia Ferrari & Francisco Cribari-Neto, 2004. "Beta Regression for Modelling Rates and Proportions," Journal of Applied Statistics, Taylor and Francis Journals, vol. 31(7), pages 799-815, January. [Downloadable!] (restricted)
  3. Hallstrom, Daniel G. & Smith, V. Kerry, 2005. "Market responses to hurricanes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 541-561, November. [Downloadable!] (restricted)
  4. Viscusi, W Kip & Magat, Wesley A, 1992. " Bayesian Decisions with Ambiguous Belief Aversion," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 371-87, October.
  5. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June. [Downloadable!] (restricted)
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  6. Okmyung Biny & Stephen Polasky, 2004. "Effects of Flood Hazards on Property Values: Evidence Before and After Hurricane Floyd," Land Economics, University of Wisconsin Press, vol. 80(4). [Downloadable!] (restricted)
  7. Trudy Cameron, 2005. "Updating Subjective Risks in the Presence of Conflicting Information: An Application to Climate Change," Journal of Risk and Uncertainty, Springer, vol. 30(1), pages 63-97, January. [Downloadable!] (restricted)
    Other versions:
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