Econometric testing for risk averse behaviour in agriculture

Abstract

The time–series behaviour of commodity prices and consumption expenditures are examined under the assumption of risk averse speculative storage. An asset pricing model of commodity storage is specified with constant relative risk aversion utility and lognormally distributed commodity prices. Testing the overidentifying restrictions constitutes a joint test that the model is valid and that agents have rational expectations. The risk premium on commodity storage markets is characterized in terms of the relative risk aversion parameter of a representative agent and estimates of this parameter can be obtained using maximum likelihood methods. In an application to US corn, wheat and soybean storage, a risk premium is found and the resulting estimates of the relative risk aversion parameter compare favourably with prior information about farmer risk attitudes.