Integrating Physical and Financial Approaches to Manage Environmental Financial Risk on the Great Lakes

Abstract

Physical and financial approaches each provide different benefits for managing environmental financial risks. Index insurance contracts, a financial approach, have been proposed for managing numerous environmental financial risks. A method for testing when and how physical (dredging) and financial risk management strategies (index insurance) could be deployed in tandem to maximize improvements in utility for commercial shippers on the Great Lakes is developed using principles from the benefit-cost analysis and expected utility theory. Using a utility function with a decreasing marginal utility of income explicitly models the risk aversion of commercial shippers. The probabilistic nature of future revenue and costs is modeled and combined with the utility function to determine a Net Option Value. This value represents the maximum amount commercial shippers would pay more than the cost for reduced variability in net revenues. Results indicate that while the Net Option Value for dredging exceeds the potential benefits of using insurance contracts alone, the combination of dredging and insurance can improve overall utility with less cost than dredging alone. The strong autocorrelation in lake levels over long periods reduces the value of index insurance, such that the results show a potential lower bound of the value of combining physical and financial approaches in highly variable systems.

A multi-objective optimization algorithm based on the identification of risk spillover intensity measurement in Chinese financial markets

“…Various extreme events have led to large and violent fluctuations in global capital markets, causing great damage to the world economy and financial development, resulting in the bankruptcy and collapse of many financial companies and the depression of the real economy [4][5]. Therefore, financial market risk management is particularly important in China's financial markets today, with developed markets and diversified investment channels [6][7].…”

“…Rui Mao, Fuxiang Liang and Jingjing Wang. Applied Mathematics and Nonlinear Sciences, 9(1) (2024)[1][2][3][4][5][6][7][8][9][10][11][12][13][14][15] …”