The Paradox of Risk Balancing: Do Risk-reducing Policies Lead to More Risk for Farmers?

The study presents stochastic optimal control/dynamic programming (SOC/DP) to derive the optimal debt level and consumption in farm models concerning two sources of uncertainty: the return on assets and interest rate. The SOC/DP analytic framework is used to analyze the impacts of risk-reducing farm policies on farm’s financial and risk adjustments. The results show the violations of the risk-balancing concept, which theorizes that risk-reducing farm policies may lead to increases in financial leverage, total risk, and the expected returns. Also, this study examines the extent to which the estimates of the optimal debt level are biased when interest rate risk is ignored.


Issue Date:
2008
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/6546
Total Pages:
28
Series Statement:
Selected Paper
465004




 Record created 2017-04-01, last modified 2017-08-23

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