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Risk and marketing behavior: pricing fed cattle on a grid
Authors:Scott W Fausti  Bashir A Qasmi  Matthew A Diersen
Institution:Department of Economics, South Dakota State University, , Brookings, SD 57007, USA
Abstract:A seven‐year comparative study of grid pricing versus average pricing of slaughter cattle was conducted to evaluate carcass quality market signals. The primary objectives of the study are to determine: (1) if market signals sent through the grid pricing system indicate an improvement in the grid incentive mechanism over time, (2) how changes in the grid premium and discount structure associated with carcass quality affect the market risk premium, and (3) if changes in price risk (variance) affect producer marketing decisions. An Exponential‐Autoregressive‐Conditional‐Heteroskedasticity‐in‐Mean (EARCH‐in‐Mean) modeling procedure was adopted. Empirical results suggest that the grid premium and discount structure is slowly adjusting carcass quality market signals to encourage marketing on a grid and discourage marketing by the pen. The inclusion of the conditional variance in the empirical model indicates that variance associated with the carcass quality risk premium adds financial risk associated with the adoption of grid pricing.
Keywords:EARCH  Conditional variance  Grid marketing decisions  Risk premium  Slaughter cattle  Variance risk premium  C20  D81  Q13
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