Hedging Supply Risks: An Optimal Water Portfolio
AD Leroux, VL Martin
American Journal of Agricultural Economics | Oxford University Press | Published : 2016
Although water supply diversification has been proposed as a solution to dwindling water reserves, the optimal mix of natural and manufactured sources of water remains largely unexplored. We develop a dynamic portfolio model of water supply that hedges against the supply risks from all potential water sources, by taking into account the size of water reserves, uncertainties of water flows as well as differences in supply costs. The optimal portfolio shares for an existing water supply system are derived and compared with the observed contributions to total water stock, revealing unexploited hedging opportunities between various naturally occurring water sources as well as a general over-reli..View full abstract
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The authors thank James Fogarty, John Freebairn, Pedro Gomis-Porqueras, Greg Hertzler, John Quiggin, Paulo Santos, and two anonymous reviewers for insightful comments on earlier drafts of this article. Funding from the Victorian Centre for Climate Change Adaptation Research and from the Cooperative Research Centre for Water Sensitive Cities is acknowledged. Correspondence may be sent to: firstname.lastname@example.org.