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Risk And Probability Premiums For Cara Utility Functions

Listed author(s):
  • Babcock, Bruce A.
  • Choi, E. Kwan
  • Feinerman, Eli

The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

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File URL: http://purl.umn.edu/30810
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Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 18 (1993)
Issue (Month): 01 (July)
Pages:

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Handle: RePEc:ags:jlaare:30810
Contact details of provider: Web page: http://waeaonline.org/

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  1. Matthew T. Holt & Jon A. Brandt, 1985. "Combining price forecasting with hedging of hogs: An evaluation using alternative measures of risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(3), pages 297-309, 09.
  2. Arthur H. Grube, 1986. "Participation in Farm Commodity Programs: A Stochastic Dominance Analysis: Comment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(1), pages 185-188.
  3. repec:cdl:agrebk:1141583 is not listed on IDEAS
  4. Rister, M. Edward & Skees, Jerry R. & Black, J. Roy, 1984. "Evaluating Use of Outlook Information in Grain Sorghum Storage Decisions," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 16(01), pages 151-158, July.
  5. J. M. Antle & W. J. Goodger, 1984. "Measuring Stochastic Technology: The Case of Tulare Milk Production," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 66(3), pages 342-350.
  6. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
  7. Rister, M. Edward & Skees, Jerry R. & Black, J. Roy, 1984. "Evaluating Use Of Outlook Information In Grain Sorghum Storage Decisions," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 16(01), July.
  8. H. Alan Love & Steven T. Buccola, 1991. "Joint Risk Preference-Technology Estimation with a Primal System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(3), pages 765-774.
  9. Robert N. Collender & David Zilberman, 1985. "Land Allocation under Uncertainty for Alternative Specifications of Return Distributions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(4), pages 779-786.
  10. Buccola, Steven T., 1982. "Portfolio Selection Under Exponential And Quadratic Utility," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 7(01), July.
  11. Randall A. Kramer & Rulon D. Pope, 1981. "Participation in Farm Commodity Programs: A Stochastic Dominance Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(1), pages 119-128.
  12. Joseph Yassour & David Zilberman & Gordon C. Rausser, 1981. "Optimal Choices among Alternative Technologies with Stochastic Yield," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(4), pages 718-723.
  13. Babcock, Bruce A. & Chalfant, James A. & Collender, R. N., 1987. "Simultaneous Input Demands and Land Allocation in Agricultural Production Under Uncertainty," Staff General Research Papers Archive 10614, Iowa State University, Department of Economics.
  14. King, Robert P. & Lybecker, Donald W., 1983. "Flexible, Risk-Oriented Marketing Strategies For Pinto Bean Producers," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 8(02), December.
  15. William T. McSweeny & Randall A. Kramer, 1986. "The Integration of Farm Programs for Achieving Soil Conservation and Nonpoint Pollution Control Objectives," Land Economics, University of Wisconsin Press, vol. 62(2), pages 159-173.
  16. James A. Chalfant & Robert N. Collender & Shankar Subramanian, 1990. "The Mean and Variance of the Mean-Variance Decision Rule," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(4), pages 966-974.
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