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Integration of VaR and expected utility under departures from normality

  • Peter J. Barry
  • Bruce J. Sherrick
  • Jianmei Zhao
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    This article identifies the level of the expected utility (EU) risk aversion and Value-at-Risk (VaR) confidence level that yield the same choice from a given distribution of outcomes, and thus allow for consistent application of the two criteria. The result for a given distribution is an explicit mapping between risk aversion under EU and VaR, for both normal and nonnormal distributions. The Cornish-Fisher expansion is used to establish adjusted mean-deviates for nonnormal outcome distributions and the investor's preference function is expanded to include elements for variance, skewness, and excess kurtosis. A farm-level application with nonnormal revenue distribution illustrates these approaches. Copyright (c) 2009 International Association of Agricultural Economists.

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    Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

    Volume (Year): 40 (2009)
    Issue (Month): 6 (November)
    Pages: 691-699

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    Handle: RePEc:bla:agecon:v:40:y:2009:i:6:p:691-699
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