Endogenous risk in rational-expectations commodity models: A multivariate generalized ARCH-M approach

Matthew T. Holt, Satheesh V. Aradhyula

Research output: Contribution to journalArticlepeer-review

20 Scopus citations

Abstract

The feasibility of including endogenous risk in a rational-expectations model is examined by using a multivariate GARCH-M setup. Unlike previous attempts to model risk under the rational-expectations hypothesis (REH), the model's full covariance structure is allowed to be time varying. The application is with a market model of the U.S. broiler industry; results indicate broiler production is responsive to time-varying price volatility, although the estimated effects are not large. The GARCH-M model is compared with one that uses a two-step approach. Evidence indicates the informationally efficient GARCH-M approach is superior.

Original languageEnglish (US)
Pages (from-to)99-129
Number of pages31
JournalJournal of Empirical Finance
Volume5
Issue number2
DOIs
StatePublished - Jun 1998

Keywords

  • Broiler market
  • Endogenous risk
  • Multivariate GARCH-M models
  • Rational expectations
  • Supply response

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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