Examining quota values with consideration for risk
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Date
2016
Authors
Ritchie, Jordan
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Abstract
The objective of this thesis was to determine the effect of income volatility risk on quota values in the Canadian dairy industry. A quota valuation model was developed to explain the relationship between quota value and its potential determinants, including a risk premium that accounted for dairy producer risk preferences and a measure of income volatility risk. The empirical analysis was applied to the Ontario dairy industry, and monthly data was collected for the period October 1990 through July 2009. Three econometric models were estimated using the ordinary least squares and generalized least squares approaches to estimate the relationship between quota value and the explanatory variables. The generalized least squares estimation approach was applied to the econometric models to account for the presence of autocorrelation. Robust standard errors were reported in the presence of heteroskedasticity. The first model included the discounted flows of expected returns and risk premiums as explanatory variables. The second model expanded on the first by adding policy risk and technological change as explanatory variables. The third model adjusted the second model by replacing the discounted flows of expected returns and risk premiums with the non-discounted values of these variables. Three models were specified and estimated to compare the estimation results and determine which specification best explained quota values over the sample period. The significance test for the first regression under ordinary least squares estimation concluded that the discounted risk premium flows were statistically significant at the 5% significance level. However, the discounted risk premium flows took on an unexpected sign that did not coincide with economic theory. Hypothesis tests for all other regression scenarios concluded that the risk premium was statistically insignificant at the 5% significance level. Therefore, given the functional form of the econometric models, the dataset, and the estimation procedures, the empirical results did not provide definitive evidence that income volatility risk influenced quota values in the Ontario dairy industry for the period October 1990 through July 2009.
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Keywords
Quota value, Risk