Integration of VaR and expected utility under departures from normality

Peter J. Barry, Bruce J Sherrick, Jianmei Zhao

Research output: Contribution to journalArticlepeer-review

Abstract

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.

Original languageEnglish (US)
Pages (from-to)691-699
Number of pages9
JournalAgricultural Economics
Volume40
Issue number6
DOIs
StatePublished - Nov 1 2009

Keywords

  • Cornish-Fisher expansion
  • Expected utility
  • Risk aversion
  • Value-at-Risk

ASJC Scopus subject areas

  • Agronomy and Crop Science
  • Economics and Econometrics

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