The Impacts of Joint Energy and Output Prices Uncertainties in a Mean-Variance Framework

Abstract

In this paper, we analyze the impacts of joint energy and output prices uncertainties on the inputs demands in a mean-variance framework. We find that the concepts of elasticities and variance vulnerability play important roles in the comparative statics analysis. If the firms' preferences exhibit variance vulnerability, increasing the variance of energy price will necessarily cause the risk averse firm to decrease the demands for the non-risky inputs. Further, we investigate two special cases with only uncertain energy price and only uncertain output price. In the case with only uncertain energy price, we find that the uncertain energy price has no impact on the demands for the non-risky inputs. Besides, if the firms' preferences exhibit variance vulnerability, increasing the variance of energy price will surely cause the risk averse firm to decrease the demand for energy.

Sourcing decision under interconnected risks: an application of mean–variance preferences approach

“…Therefore, this paper focuses on modelling the attitude of a risk averse manufacturer to obtain optimal supply decision under tightly versus loosely interconnected risks utilising the two-moment (i.e., mean-standard deviation) decision theoretic approach. This modelling approach has also been applied by Eichner & Wagener, 2003, 2009Alghalith et al, 2017;Broll & Mukherjee, 2017;Broll et al, 2019;Huang & Jiang, 2020;Padhi & Mukherjee, 2021; among a few of the many. In such decision-theoretic modelling approach, the preferences over random distributions of the objective function are represented by the utility function, which is defined over only the mean and standard deviation of the objective function.…”

“…In such decision-theoretic modelling approach, the preferences over random distributions of the objective function are represented by the utility function, which is defined over only the mean and standard deviation of the objective function. Multiple sources of risk can be accommodated easily within a quasi-linear objective function as a linear combination of multiple random variables, all of which are multivariate normally distributed within a location-scale family (Chamberlain, 1983;Owen & Rabinovitch, 1983;Eichner & Wagener, 2009;Alghalith, 2017;Huang & Jiang, 2020;Padhi & Mukherjee, 2021).…”

“…To answer the three research questions mentioned above, we have used a two-moment (or equivalently, a mean-standard deviation) decision-theoretic approach (see, for example, Eichner & Wagener, 2003, 2009Alghalith et al, 2017;Broll & Mukherjee, 2017;Broll et al, 2019;Padhi & Mukherjee, 2021). In such decision-theoretic modelling approach, the preferences over random distributions of the objective function are represented by the utility function, which is defined over only the mean and the variance (or standard deviation) of the objective function.…”

Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach

“…Therefore, in our decision problem, both sources of risk enter the objective function as a linear combination of two random variables, being jointly elliptically distributed for the location-scale condition, which is well-established in the literature (e.g., Chamberlain, 1983;Owen and Rabinovitch, 1983;Dalal and Alghalith, 2009;Alghalith, 2010;Alghalith et al, 2017).…”

Big Data, Computational Science, Economics, Finance, Marketing, Management, and Psychology: Connections

“…They also show that the concepts of elasticity and decreasing absolute risk aversion (DARA) play an important role in the comparative statics analysis. Alghalith et al (2017b) analyze the impacts of joint energy and output prices uncertainties on the inputs demands in a mean-variance framework. They find that the concepts of elasticities and variance vulnerability play important roles in the comparative statics analysis.…”