Stochastic Efficiency Analysis Research Articles

Robust portfolio optimization: a stochastic evaluation of worst-case scenarios

This article presents a new approach for building robust portfolios based on stochastic efficiency analysis, by using the Chance Constrained Data Envelopment Analysis (CCDEA) model and periods of market downturn, i.e. worst-state market. The model is able to accommodate investors who exhibit different risk behaviors and the empirical analysis is done on assets traded on the Brazil Stock Exchange, B3 (Brasil, Bolsa, Balcão). The results confirm that the proposed model achieved portfolios that at the same time reduced systematic risk and maximized portfolio returns when working with worse market state data and higher levels of risk aversion. A higher level of risk aversion also led to better risk-return ratios, which can be seen in higher Sharpe ratio values.

Comparing net returns in the feedlot: Bos Taurus vs. Bos Indicus influenced steers with varying anabolic implant intensity.

There are two main beef cattle breed types: Bos Taurus (BT) and Bos Indicus (BI). Past research has demonstrated various expected differences in growth, temperament, feeding behavior, and carcass characteristics between these breed types when administered varying levels of anabolic implant. However, little is known about the differences in expected economic returns between these cattle types. The objective of this research is to simulate and compare the expected net returns of BT, Angus (AN) steers and BI influenced, Santa Gertrudis (SG) steers, with moderate or high intensity levels of implants relative to a control with no implant. The animal performance and carcass data for this economic analysis was provided from a recent feeding experiment of AN and SG influenced steers. In the experiment, sixty steers were stratified by weight and breed in a 2 × 3 factorial design examining the two different breeds: AN (N = 38) or SG influenced (N = 22), and three implant strategies: no implant (N = 20), a moderate intensity implant protocol (d0 implant: Revalor-G, d56 implant: Revalor-IS, d112 implant: Revalor-S; n=20), or a high intensity implant protocol (d0 implant: Revalor-IS, d56 implant: Revalor-S, d112 implant: Revalor-200; N = 20). The steers performance and carcass data were used together with publicly available price and input costs data in the simulation of net returns per animal for each of the treatment groups. Results demonstrated that both moderate and high intensity implanted BT steers have higher expected net return (US$78.70/hd. and US$75.84/hd., respectively) compared to BI moderate and high intensity implanted steers (US$47.03/hd. and $6.98/hd., respectively). Stochastic efficiency analysis with respect to a function demonstrated when certainty equivalent values are constrained to those ≥US$0, only the moderate implanted BT steers would be included in the efficient set.

Greenhouse Gas Emission Reduction Potentials in Europe by Sector: A Bootstrap-Based Nonparametric Efficiency Analysis

The reduction of greenhouse gas emissions is the key action to limit global warming. An important source of greenhouse gas emissions and pollution is the inefficiency of production processes. We report results from a stochastic nonparametric efficiency analysis using directional distance functions to take account of undesirable outputs like greenhouse gases. With this approach, we are able to provide estimates of the potential emission reductions for 7 main sectors in 16 European countries. A specially adapted bootstrapping approach allows to implement a bias correction of the estimates and to compute confidence intervals. The results show that static efficiency improvements are a quantitatively important element of the emission reductions which are required to achieve the reduction targets of the European Union.

Economic and stochastic efficiency analysis of alternative cover crop systems in Louisiana

SummaryLandowners can engage in voluntary conservation with the help of incentive programs. Recommended conservation practices are selected based on management intentions as well as the contribution of those practices to the overall net returns. However, conservation motives are heterogeneous and based on individual risk behavior. Existing cost-share programs might either under-fund or over-fund conservation, which could lead to inefficient management of natural resources. The current analysis evaluates the economic feasibility of variable cover crop strategies, multiple seeding rates, within a soybean production system in silt loam and clay soils. The study utilizes stochastic efficiency with respect to a function, referred to as SERF, for determining the preferred strategies under various risk preferences. The SERF method accounts for the heterogeneity of individual decision-making with regards to conservation adoption. Results indicate that most risk-averse farmers chose tillage radish with medium seeding rate as their preferred strategy. However, as the risk-bearing capacity of an individual increases, the current level of incentives does not motivate to implement conservation. The most preferred plan for risk-neutral farmers is the fallow system in both silt loam and clay soils. The economic and risk assessment framework can improve understanding of the temporal dynamics of different practices and inform policy on conservation structure that promotes agricultural systems that are economically, environmentally, and socially sustainable.

Comparison of Conventional and IPM Cropping Systems: A Risk Efficiency Analysis

AbstractTo support decision-makers considering adopting integrated pest management (IPM) cropping in Norway, we used stochastic efficiency analysis to compare the risk efficiency of IPM cropping and conventional cropping, using data from a long-term field experiment in southeastern Norway, along with data on recent prices, costs, and subsidies. Initial results were not definitive, so we applied stochastic efficiency with respect to a function, limiting the assumed risk aversion of farmers to a plausible range. We found that, for farmers who are risk-indifferent to moderately (hardly) risk averse, the conventional system was, compared to IPM, less (equally) preferred.

Farmers’ perceptions and management of risk in rice-based farming systems of south-west coastal Bangladesh

Farmers in coastal Bangladesh face significant production and market risks as well as uncertainty about trends in the farming environment. Understanding farmers’ perceptions of the risks they currently experience and the farming and livelihood strategies they adopt to mitigate risk is important to inform policies designed to safeguard coastal livelihoods in the future. In this paper, we draw on a case study of typical village in the coastal zone to explore (1) farmers’ perceptions of the cropping risks they face, (2) the implications of risk for the choice of cropping strategies within different farm types, and (3) the role of other farm and non-farm activities in mitigating risk to household livelihoods. Quantitative and qualitative farm-level data were collected through a reconnaissance survey, a village census, a household survey, and household case studies. Farmers saw the shortage of irrigation water in the dry season and uncertain weather patterns as the major sources of production risk. The main source of market risk was the fluctuation in farm-gate demand and prices for dry-season cash crops. Representative budgets were constructed for the major cropping systems practised by small, medium, and large farm households. The riskiness of these systems was simulated, based on farmers’ estimates of yield and price variability, and a stochastic efficiency analysis was undertaken. The current systems appeared economically viable given the typical range of yields and prices. While some were riskier than others, farm households were largely able to balance their livelihood portfolios to offset the risks. Major risk management strategies included adoption of stress-tolerant rice varieties, staggering the sale of rice, using early wet season rice as a buffer, switching from rice to non-rice crops in the dry season, and undertaking off- or non-farm employment within and outside the village. The dominant trend was to farm and livelihood diversification, contributing to household resilience. However, at the village level, public policy to safeguard the agricultural environment will be crucial to sustaining household risk management strategies.

Sensitivity of university rankings: implications of stochastic dominance efficiency analysis

ABSTRACTTo create their rankings, university-ranking agencies usually combine multiple performance measures into a composite index. However, both rankings and index scores are sensitive to the weights assigned to performance measures. This paper uses a stochastic dominance efficiency methodology to obtain two extreme, case-weighting vectors using the Academic Ranking of Worldwide Universities (ARWU) and Times Higher Education (THE) data, both of which lead to the highest and lowest index outcomes for the majority of universities. We find that both composite scores and rankings are very sensitive to weight variations, especially for middle- and low-ranked universities.

Sensitivity of University Rankings: Implications of Stochastic Dominance Efficiency Analysis

To create their rankings, university-ranking agencies usually combine multiple performance measures into a composite index. However, both rankings and index scores are sensitive to the weights assigned to performance measures. This paper uses a stochastic dominance efficiency methodology to obtain two extreme, case-weighting vectors using the Academic Ranking of Worldwide Universities (ARWU) and Times Higher Education (THE) data, both of which lead to the highest and lowest index outcomes for the majority of universities. We find that both composite scores and rankings are very sensitive to weight variations, especially for middle- and low-ranked universities.

<b>Stochastic evaluation of robust portfolios based on hierarchical clustering and worst-case scenarios

The objective of this paper is to present a proposal to form robust portfolios using a stochastic efficiency analysis of assets from companies in the Sao Paulo Stock Exchange, focusing on the worst market state. In order to do this, information about the market in all of its phases and information from low market periods were employed in a stochastic efficiency analysis using the Chance Constrained Data Envelopment Analysis method, along with a Hierarchical Clustering approach. Then, the portfolios underwent a capital allocation model to obtain the ideal participation of each share. The portfolios formed in both scenarios were analyzed and compared. The joint application of the approaches supplied with information about the worst market state was able to form robust portfolios that lead to a higher accumulated return in the validation period than portfolios optimized from information about the entire period, and still resulted in portfolios with smaller beta values.

Quantile forecast combination using stochastic dominance

This paper derives optimal forecast combinations based on stochastic dominance efficiency (SDE) analysis with differential forecast weights for different quantiles of forecast error distribution. For the optimal forecast combination, SDE will minimize the cumulative density functions of the levels of loss at different quantiles of the forecast error distribution by combining different time-series model-based forecasts. Using two exchange rate series on weekly data for the Japanese yen/US dollar and US dollar/Great Britain pound, we find that the optimal forecast combinations with SDE weights perform better than different forecast selection and combination methods for the majority of the cases at different quantiles of the error distribution. However, there are also some very few cases where some other forecast selection and combination model performs equally well at some quantiles of the forecast error distribution. Different forecasting period and quadratic loss function are used to obtain optimal forecast combinations, and results are robust to these choices. The out-of-sample performance of the SDE forecast combinations is also better than that of the other forecast selection and combination models we considered.

Scale, quality and efficiency in road maintenance: Evidence for English local authorities

This paper outlines the first econometric stochastic frontier efficiency analysis of road maintenance costs for local authorities in England in the academic literature. It is motivated by current public sector austerity requiring local authorities to provide efficient highway functions both in terms of learning from best practice (economic efficiency) and potential reorganisation to exploit economies of scale (scale efficiency). The analysis utilises a road condition measure and an end user (public) satisfaction indicator as well as road length and traffic factors. The availability of public satisfaction data is particularly important as incorporation of such a measure into benchmarking is currently in its infancy in economic regulation but is increasing in prominence, such as in regulation of health care. Evidence is found for an optimal road length which has implications for the current trend to merge the delivery of highways services across local authorities. Bigger is not necessarily better. A positive relationship is found between public satisfaction and cost which is strongest for very low or high public satisfaction. Finally, the median cost efficiency is 83% which implies many authorities have the opportunity to save substantial sums by adopting best practice without reducing service quality.

Stochastic network DEA models for two-stage systems under the centralized control organization mechanism

This paper deals with an extension of the conventional DEA formulations by taking into account the serial relationship of two-stage processes with stochastic data. The stochastic two-stage network DEA model is proposed based on centralized control organization mechanism. The stochastic two-stage network DEA model is converted into a deterministic linear programming model under the assumption that components of inputs, outputs and intermediate products are related with some basic stochastic factors. Stochastic efficiency analysis including the relationships of the whole process and the two sub-processes are then discussed. In addition, an example of 16 commercial banks in China is used to calculate the efficiencies under different levels by applying the proposed model.

Stochastic geometry modeling and energy efficiency analysis of millimeter wave cellular networks

Current wireless networks face unprecedented challenges because of the exponentially increasing demand for mobile data and the rapid growth in infrastructure and power consumption. This study investigates the optimal energy efficiency of millimeter wave (mmWave) cellular networks, given that these networks are some of the most promising 5G-enabling technologies. Based on the stochastic geometry, a mathematical framework of coverage probability is proposed and the optimal energy efficiency is obtained with coverage performance constraints. Numerical results show that increasing the base station density damages coverage performance exceeding the threshold. This work demonstrates an essential understanding of the deployment and dynamic control of energy-efficient mmWave cellular networks.

Second order stochastic dominance efficiency analysis of Borsa Istanbul

Ortalama-varyans portfoy teorisi portfoy secim problemi icin kullanilan en yaygin yaklasimlardan birisidir. Yakin gecmiste, stokastik baskinlik kisitli optimizasyon problemi ile etkin portfoylerin bulunabilecegini gosteren calismalar gelistirilmistir. Bu calismada Borsa Istanbul Hisse senetleri icin Ikinci Derece Stokastik Baskinlik kisitli portfoy optimizasyonu problemi dikkate alinmaktadir. Sonuclarimiz Borsa Istanbul icin Ikinci Derece Stokastik Baskinlik kisitli optimizasyon problemi ile geleneksel yontemlere nazaran daha etkin portfoyler bulunabilecegini gostermektedir. Ayrica Borsa Istanbul’da islem goren sirketlere ait hisse senedi getirilerinin ikiserli etkinlikleri Stokastik Baskinlik kriteri kullanilarak analiz edilmistir. Sonuclar bir yatirim getirisinin riski acisindan onem tasimaktadir. 1. GIRIS

Valuing the Seed of an Improved Switchgrass Cultivar

ABSTRACTSwitchgrass (Panicum virgatum L.) has been identified as a model perennial grass species to compete with alternative sources for providing biomass to fulfill cellulosic biofuels provisions of the US Energy Independence and Security Act of 2007. The objective of this study is to determine the value of a more productive switchgrass variety relative to that of the best available alternative. Biomass data were produced in an experiment with four commercial switchgrass cultivars (Alamo, Blackwell, Kanlow, and Cave‐in‐Rock) and five experimental lines over 4 yr at Stillwater, OK. One of the experimental lines, Cimarron, was released as a cultivar in 2008 during the experiment. The remaining four experimental lines were NL93‐2, NSL 2001‐1, NL 94‐2001‐1, and NSU 95‐2001. An ANOVA model is used to test for differences in switchgrass yield. Enterprise budgets are used to calculate net returns and stochastic efficiency analysis is used to investigate yield risk. For a farm‐gate biomass price of $50 Mg−1, expected net returns were estimated to be $80 ha−1 yr−1 greater in postestablishment years for Cimarron than for Alamo. Assuming a year for establishment, nine postestablishment production years, a farm‐gate biomass price of $50 Mg−1, a discount rate of 6.5%, and environmental conditions similar to those that prevailed during the field experiment, the net present value of seeding a field in the region to Cimarron rather than Alamo would be $501 ha−1.

Stochastic efficiency analysis with a reliability consideration

Stochastic Data Envelopment Analysis (DEA) models have been introduced in the literature to assess the performance of operating entities with random input and output data. A stochastic DEA model with a reliability constraint is proposed in this study that maximizes the lower bound of an entity׳s efficiency score with some pre-selected probability. We define the concept of stochastic efficiency and develop a solution procedure. The economic interpretations of the stochastic efficiency index are presented when the inputs and outputs of each entity follow a multivariate joint normal distribution.

Assessing Organic Cherry Farmers’ Strategies under Different Policy Options

Organic farming has experienced a vast increase within the EU. Especially in Greece, the rapid growth of the organic sector, since the early ‘90s, was accompanied by the introduction of various organic crops. Among them, organic fruit crops have been gradually introduced, as farmers have realised the promising growth of the demand for organic fruits. However, organic farmers face significant yield and price risks, which combined with the high initial establishment costs, provoke difficult investment decisions. Rational farmers are willing to adopt organic farming only if the economic outcomes outweigh the associated increased risk and uncertainty. This study employs stochastic efficiency analysis to compare the economic outcomes of organic and conventional cherry production in Northern Greece. It, thus, explores whether the expansion of organic cherry production generates satisfactory economic results for farmers and whether it can be regarded as a promising alternative to conventional production activity. Results reveal that the current Greek policy scheme may endanger investments in organic cherry farming. Further assessment of the impact of varying organic subsidy and discount rate levels on the net present value underlines the detrimental effects of the financial crisis. An enhanced policy framework is required to enable and support climate-smart agriculture.

Aging of the labor force and technical efficiency in crop production

PurposeThe purpose of this paper is to analyze the extent of aging in the agricultural labor force and its effect on farm production in a province of China.Design/methodology/approachThe analysis uses panel data for the years 2004 through 2008 from a representative sample of farm households in Liaoning province. Descriptive statistics reveal the age structure of the agricultural labor force and correlations between labor force age and production characteristics. A translog stochastic frontier production function and technical inefficiency model is employed to analyze the effect of aging of the labor force on the technical efficiency of crop production.FindingsThe paper finds an accelerating trend towards aging of the agricultural labor force in the data. Results from the stochastic frontier production function and efficiency analysis reveal that household‐level technical efficiency increases until maximum efficiency is reached when the average age of the household labor force is 45, after which efficiency declines.Practical implicationsAging of China's rural labor force may affect efficiency and productivity in crop production. Agricultural policies may need to pay more attention to the aging of the agricultural labor force. Some measures should be taken to address the pattern of migration, and policies to improve the social and economic environment in rural areas for younger workers should be developed. Also, extension programs could help older farmers to maintain efficient farming methods.Originality/valueThis is one of very few analyses of the effects of aging on production efficiency for a developing country, as well as for China. The analysis uses a unique panel dataset that covers 24 counties, 1,890 rural households, and more than 6,000 individuals, with each household tracked for five years. Most of the literature estimating technical efficiency carries out the analysis at the individual level; in China and other developing countries, farming is carried out at the household level. We have adapted the methodology to apply to situations where the unit of analysis is the household.

Aggregate investor preferences and beliefs: A comment

A recent study in this journal presents encouraging results of a daunting simulation analysis of the statistical properties of a centered bootstrap approach to stochastic dominance efficiency analysis. However, by relying on the first-order optimality condition in a situation where multiple optima may occur, the empirical analysis draws the questionable conclusion that some of the toughest data sets in empirical asset pricing can be rationalized by the representative investor maximizing an S-shaped utility function, consistent with the so-called Prospect Stochastic Dominance criterion. Further research could be directed to developing global optimization algorithms and consistent re-sampling methods for statistical inference for general risky choice problems. • Standard portfolio and asset pricing theory assume risk aversion. • Risk seeking introduces the need for global optimization method. • First-order conditions are not sufficient for the global maximum. • A proper global optimality test finds market portfolio inefficiency. • The aggregated investor does not seem to obey the 'PSD' rule.

Stochastic efficiency analysis of alternative basic grain marketing strategies

ABSTRACT The use of modern routine marketing strategies to minimize risk exposure is not a widely adopted practice among grain producers. The producers tend to use high risk strategies which include the selling of the crop on the cash market after harvest; while the high market risks require innovative strategies including the use of futures and options as traded on South African Futures Exchange (SAFEX). This is mostly due to a lack of interest and knowledge of the market. The purpose of the study is to examine whether the adoption of basic routine strategies is better than adopting no strategy at all. The study illustrates that by using a Stochastic Efficiency with Respect to a Function (SERF) and Cumulative Distribution Function (CDF) that the use of three basic strategies for each crop type, namely, a Put (plant time)-, (Three-segment-), (Critical Moment in production/marketing process) and Sell after pollination can be more rewarding. These strategies can be adopted by farmers without an in-depth understanding of the market and market signals. The results obtained from the study illustrate that each strategy is different for each crop. It also indicates that no strategy is worse than a specific strategy and that the choice between strategies depends on the risk aversion level of the producer. It is imperative to note that the use of hedging strategies is better than no strategy at all.