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Integration of VaR and expected utility under departures from normality
Author(s) -
Barry Peter J.,
Sherrick Bruce J.,
Zhao Jianmei
Publication year - 2009
Publication title -
agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.29
H-Index - 82
eISSN - 1574-0862
pISSN - 0169-5150
DOI - 10.1111/j.1574-0862.2009.00408.x
Subject(s) - kurtosis , econometrics , risk aversion (psychology) , skewness , normality , economics , variance (accounting) , preference , expected utility hypothesis , normal distribution , value at risk , statistics , mathematics , risk management , accounting , management
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.