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Robustness of the Mean‐Variance Model with Truncated Probability Distributions
Author(s) -
Hanson Steven D.,
Ladd George W.,
Curtiss Charles F.
Publication year - 1991
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1242728
Subject(s) - variance (accounting) , econometrics , expected utility hypothesis , mathematics , robustness (evolution) , probability distribution , statistics , expected value , constant (computer programming) , truncated normal distribution , economics , computer science , biochemistry , chemistry , accounting , gene , programming language
The known sufficient conditions for the mean‐variance framework to produce expected utility results are violated in the presence of truncated probability distributions. A theoretical simulation is conducted to examine the ability of the linear mean‐variance model to approximate expected utility results when the income distribution is truncated by the use of commodity option contracts. The mean‐variance model is shown to produce solutions that are close approximations to the expected utility model results under the assumptions of constant absolute risk aversion and normally distributed prices. However, some inconsistency was found between the comparative static results of the two models.