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Diversification in Area-Yield Crop Insurance : The Multi Linear Additive Model

  • Geoffroy Enjolras
  • Robert Kast
  • Patrick Sentis

Diversification is the traditional way farmers use to hedge against crop yield variations. However, most insurance policies and financial contracts do not take into account this strategy in their design. In this context, we develop a of portfolio insurance model based on area-yield crop indices. This Multi-Linear Additive Model (Multi-LAM extends previous linear approaches while it preserves their theoretical properties. We determine the conditions of use of our model and prove that it can be used despite crop yields correlations. An application to a large sample of French farms reveals the potential extent of the Multi-LAM, which significantly reduces the area-yield basis risk associated to the use of indices. We then discuss implications for crop insurance.

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File URL: http://www.lameta.univ-montp1.fr/Documents/DR2009-15.pdf
File Function: First version, 2009
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Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 09-15.

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Length: 33 pages
Date of creation: Nov 2009
Date of revision: Nov 2009
Handle: RePEc:lam:wpaper:09-15
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Web page: http://www.lameta.univ-montp1.fr/

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  1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
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  6. Barnett, Barry J. & Black, J. Roy & Hu, Yingyao & Skees, Jerry R., 2005. "Is Area Yield Insurance Competitive with Farm Yield Insurance?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(02), August.
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  11. Pierluigi Balduzzi & Cesare Robotti, 2005. "Mimicking portfolios, economic risk premia, and tests of multi-beta models," Working Paper 2005-04, Federal Reserve Bank of Atlanta.
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  14. Smith, Vincent H. & Chouinard, Hayley H. & Baquet, Alan E., 1994. "Almost Ideal Area Yield Crop Insurance Contracts," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(1), April.
  15. Elton, Edwin J. & Gruber, Martin J., 1997. "Modern portfolio theory, 1950 to date," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1743-1759, December.
  16. Enjolras, Geoffroy & Kast, Robert, 2007. "Using participating and financial contracts to insure catastrophe risk: Implications for crop risk management," 101st Seminar, July 5-6, 2007, Berlin Germany 9268, European Association of Agricultural Economists.
  17. Ruiz, Esther & Pascual, Lorenzo, 2002. " Bootstrapping Financial Time Series," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 271-300, July.
  18. Cabrera, Victor E. & Solis, Daniel & Letson, David, 2007. "Optimal Crop-Insurance Strategies under Climate Variability: Contrasting Insurer and Farmer Interests," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9708, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  19. Barry J. Barnett & Dmitry V. Vedenov, 2007. "Is There a Viable Market for Area-Based Crop Insurance?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 508-519.
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