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Empirical Analysis under Additive/Multiplicitave Output Uncertainty

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  • Moawia Alghalith

Abstract

Empirical studies dealing with price uncertainty are abundant; for example, Arshanapalli and Gupta (1996) derived estimating equations by applying uncertainty analogues of Hotelling's lemma and Roy's identity to the indirect expected utility function (see Pope, 1980, and, Dalal 1990). However, their method is not applicable to the models with price and output uncertainty. Few empirical studies included both price and output uncertainty and focused on hedging. For example, Rolfo (1980) computed the ratio of hedge to expected output for cocoa producers. Lapan and Moschini (1994) calculated the same ratio for soya bean farmers. Assuming simultaneous price and output uncertainty, this paper empirically estimate the most two common forms of output risk: additive risk and multiplicative risk (see Honda,1983, and, Grant 1985). Then it empirically determines which form is more suitable. The theory does not provide a conclusive criteria for the choice between additive risk and multiplicative risk (see Honda,1983). Therefore, the choice should be empirical.

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Bibliographic Info

Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200301.

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Date of creation: 15 Oct 2003
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Handle: RePEc:san:wpecon:0301

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References

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  1. Dalal, Ardeshir, 1990. "Symmetry Restrictions in the Analysis of the Competitive Firm under Price Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 207-11, February.
  2. Honda, Yuzo, 1983. "Production uncertainty and the input decision of the competitive firm facing the futures market," Economics Letters, Elsevier, vol. 11(1-2), pages 87-92.
  3. Arshanapalli, Bala G. & Gupta, Omprakash K., 1996. "Optimal hedging under output price uncertainty," European Journal of Operational Research, Elsevier, vol. 95(3), pages 522-536, December.
  4. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
  5. Viaene, Jean-Marie & Zilcha, Itzhak, 1998. "The Behavior of Competitive Exporting Firms under Multiple Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 591-609, August.
  6. Pope, Rulon D, 1980. "The Generalized Envelope Theorem and Price Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 75-86, February.
  7. Satyanarayan, Sudhakar, 1999. "Econometric tests of firm decision making under dual sources of uncertainty," Journal of Economics and Business, Elsevier, vol. 51(4), pages 315-325, July.
  8. Lapan, Harvey E. & Moschini, GianCarlo, 1994. "Futures Hedging Under Price, Basis and Production Risk," Staff General Research Papers 10041, Iowa State University, Department of Economics.
  9. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-35, May.
  10. Losq, Etienne, 1982. "Hedging with price and output uncertainty," Economics Letters, Elsevier, vol. 10(1-2), pages 65-70.
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Cited by:
  1. Alghalith, Moawia & Dalal, Ardeshir, 2009. "The choice between multiplicative and additive production uncertainty," Economic Modelling, Elsevier, vol. 26(5), pages 1129-1133, September.

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