Econometric Tests of Firm Decision Making under Uncertainty. Optimal Output and Hedging: Comment

In a comment, a recent paper by Park and Antonovitz (1992) is discussed which attempted to conduct an empirical analysis of a firm which engages in transactions in a futures market and is subject to basis risk. Park and Antonovitz (PA) obtained estimating equations for optimal output and hedging fro...

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Bibliographic Details
Published in:Southern economic journal 1994-07, Vol.61 (1), p.213-217
Main Author: Dalal, Ardeshir J.
Format: Article
Language:English
Subjects:
Communications
Decision-making
Econometrics
Economic aspects
Economic models
Economic uncertainty
Expected utility
Financial risk
Futures markets
Hedging
Mathematical independent variables
Risk (Economics)
Risk aversion
Studies
Uncertainty
Utility functions
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Summary:In a comment, a recent paper by Park and Antonovitz (1992) is discussed which attempted to conduct an empirical analysis of a firm which engages in transactions in a futures market and is subject to basis risk. Park and Antonovitz (PA) obtained estimating equations for optimal output and hedging from the indirect expected utility function using a procedure introduced by Dalal (1990) which permits the derivation of uncertainty analogues of Hotelling's Lemma. Unfortunately, the PA paper contains several errors. Among the most important of these is the fact that the parameter restrictions they impose on the indirect function contradict rather than confirm the existence of constant absolute risk aversion. Moreover, the specification of their estimating equation for output supply would be correct only if an unnecessarily restrictive assumption is made. A more general formulation for the empirical testing of firm behavior in the presence of basis risk is provided.
ISSN:0038-4038
2325-8012
DOI:10.2307/1060145