Integration of VaR and expected utility under departures from normality |
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Authors: | Peter J Barry Bruce J Sherrick Jianmei Zhao |
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Institution: | University of Illinois, 326 Mumford Hall, 1301 W. Gregory Dr., Urbana, IL 61801, USA;The Central University of Finance and Economics, Haidian District, Beijing 100081, P.R. China |
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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. |
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Keywords: | D81 G11 G32 |
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