Frances Antonovitz

A Theoretical and Empirical Approach to the Value of Information in Risky Markets

The theory of the competitive firm under price uncertainty is used to develop a money metric of a producers willingness to pay for additional information. This concept is extended to the market by formulating ex-ante and ex-post measures of the value of a rational expectations forecast. The empirical feasibility of these measures are demonstrated by application to a simple two equation model of an agricultural market.

A Producer's Willingness to Pay for Information under Price Uncertainty: Theory and Application

The theory of the competitive firm under price uncertainty is used to develop a money metric of a producers willingness to pay for additional information. For a restricted class of utility functions, empirical estimates of the money using secondary data can be derived from the firms risk averse supply or factor demand function. The procedure is illustrated by an application to an agricultural market.

Forward and Futures Markets and the Competitive Firm under Price Uncertainty

Recent remedies for managing the output price risk faced by a competitive firm sometimes include the prescription of hedging. This practice usually entails combining spot market sales with trading opportunities in forward or futures markets. The forward hedge represents a risk free price. The futures hedge offers a risky alternative which arises because of basis, the variable relationship between the spot and futures quotations. Rather than treating forward and futures as mutually exclusive or as perfect substitutes, a competitive firm can carefully construct a portfolio which combines spot, forward, and futures positions. Holthausen [9] and Feder, Just, and Sclmitz [5] (hereafter FJS), initiate an extensive discussion of a risk-averse firm which uses futures contracts when faced with an uncertain output price but no basis risk. Both articles employ general utility and density functions to derive their results. Their conclusions include independence of the production decision from the probability density of the spot price and the firms degree of risk aversion. Extensions of these two articles usually focus on the robustness of the separation conclusion to either the addition of basis or the addition of production uncertainty to the models. The risk free characteristic that Holthausen and FJS attribute to futures contracts really better describes a forward contract. Jarrow and Oldfield [11], Paul, Heifner, and Helmuth [17], and many others document the importance of recognizing the unique charapteristics of these two different types of contracts. Batlin [2] builds on the Holthausen and FJS foundation by adding basis risk to his model. FJS explicitly qualify their model as applicable to only those commodities with little or no production uncertainty. Subsequent articles augment their analysis with the condition of stochastic production. Chavas and Pope [3], Anderson and Danthine [1], Marcus and Modest [15], Ho [8], and Grant [6] all include production uncertainty in different permutations of the fundamental model. Those which simultaneously include both basis and production risk achieve analytical solutions by assuming specific utility or density functions.

Econometric Tests of Firm Decision Making under Uncertainty: Optimal Output and Hedging Decisions

The competitive firm under price uncertainty which hedges and faces basic risk is examined. Assuming constant absolute risk aversion, reciprocity conditions linking optimal output, hedging, and input decisions and leading to testable econometric restrictions are derived. The theoretical model is empirically tested with data from a large California feedlot.

The Value of a Rational Expectations Forecast in a Risky Market: A Theoretical and Empirical Approach

The central focus of this paper is to develop an easily computable money metric of an agents willingness to pay for information under risk, to extend this concept to the market, and to demonstrate its application in a simple twoequation econometric model of the U.S. fed cattle market. The paper draws on previous contributions to the theory of competitive firm under price uncertainty, namely Rothschild and Stiglitz, Sandmo, and more recently Pope (1978, 1980) and Pope, Chavas, and Just. The latter contributions provide insight into the econometric application of the theory and into the validity of producer surplus measures of firm welfare under risk. The conceptual approach presented in this paper facilitates empirical application. For a restricted class of utility functions, it is shown that the money metric of an agents willingness to pay for additional information can be computed from the firms risk-averse supply or factor demand function. While other studies (e.g., Hayami and Peterson, Freebairn, DeCanio) have derived welfare estimates of the value of a fore

Testable hypotheses of the competitive firm using hedging to manage price risk

Empirically testable reciprocity conditions linking optimal output, hedging, and input decisions are derived for the model of the competitive firm that is hedging to manage price uncertainty. Alternative sets of econometric restrictions are presented for the general expected utility framework, the case of constant absolute risk aversion, a mean-variance utility function, and unbiased expectations of futures prices. An empirical application tested the restriction on firm decision making implied by the linear mean-variance utility function and the unbiased expectations model for futures prices.