Agricultural Production Decision using Jumps and Seasonal Volatility in commodities prices dynamics
Résumé
We use agricultural commodities futures prices to investigate decision making in production when futures prices are governed by jump-diffusion process with seasonal volatility. We derive a preference independent production rule for firms that face both demand and production uncertainty. We compare this rule to the one when only Brownian motion represents the source of risk with constant volatility. Our analysis suggests that for most crops, the jump-diffusion model is sufficiently accurate to guide production decision.
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