Post by Sapphire Capital on Aug 6, 2008 22:02:03 GMT 4
Should Farmers Invest in Financial Assets as a Risk Management Strategy? Some Evidence from New Zealand
Gilbert V. Nartea
Lincoln University (NZ) - Applied Management and Computing Division
Paul Webster
Australian Journal of Agricultural and Resource Economics, Vol. 52, No. 2, pp. 183-202, June 2008
Abstract:
This study explores the potential for risk reduction by New Zealand farmers through the diversification of their farm asset portfolios to include financial investments such as ordinary industrial shares, government bonds and bank bills. Low correlations between rates of return on farm and these financial assets suggest that significant reduction of income variability might follow their inclusion in farmers portfolios. Stochastic efficiency analysis is used to analyse alternative portfolios of ordinary shares, government bonds and bank bills and New Zealand farmland, using coefficients of absolute risk aversion derived from a negative exponential utility function. The results suggest that those farmers showing high degrees of risk aversion would gain utility by including financial assets in their portfolios. Deregulation of the New Zealand economy in the 1980s appeared to reduce the potential gains from diversification. Bonds rather than ordinary shares are the main contributors to portfolios which maximise utility for individuals classified as somewhat risk averse.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1130519
Gilbert V. Nartea
Lincoln University (NZ) - Applied Management and Computing Division
Paul Webster
Australian Journal of Agricultural and Resource Economics, Vol. 52, No. 2, pp. 183-202, June 2008
Abstract:
This study explores the potential for risk reduction by New Zealand farmers through the diversification of their farm asset portfolios to include financial investments such as ordinary industrial shares, government bonds and bank bills. Low correlations between rates of return on farm and these financial assets suggest that significant reduction of income variability might follow their inclusion in farmers portfolios. Stochastic efficiency analysis is used to analyse alternative portfolios of ordinary shares, government bonds and bank bills and New Zealand farmland, using coefficients of absolute risk aversion derived from a negative exponential utility function. The results suggest that those farmers showing high degrees of risk aversion would gain utility by including financial assets in their portfolios. Deregulation of the New Zealand economy in the 1980s appeared to reduce the potential gains from diversification. Bonds rather than ordinary shares are the main contributors to portfolios which maximise utility for individuals classified as somewhat risk averse.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1130519