Risk Behavior and Rational Expectations in the U.S. Broiler Market

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1988-07-01
Authors
Aradhyula, Satheesh
Holt, Matthew
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Center for Agricultural and Rural Development
Abstract

This study examines the empirical implications of extending the rational expectations hypothesis (REH) to include price uncertainty. Unlike previous studies, a general estimation framework that incorporates both the restrictions on structural parameters and the variance-covariance terms is developed. A new time series approach known as GARCH processes is also used to generate time-varying expectations of both the means and the variances of exogenous variables in the REH model with risk.

The empirical application is with a quarterly model of the U.S. broiler industry; the results indicate that the rational expectation of price variance is an important determinant of broiler supply. Additionally, a formal test indicates that the restrictions implied by the REH cannot be rejected. The restricted model also compares favorably with an unrestricted version that uses instruments for the mean and the variance of expected prices.

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