Optimal Demand for Index Insurance Under Basis Ambiguity

18 Pages Posted: 15 Apr 2020

See all articles by Fujii Yoichiro

Fujii Yoichiro

Meiji University - School of Commerce

Yusuke Osaki

Waseda University - School of Commerce

Date Written: March 26, 2020

Abstract

This study examines how basis ambiguity influences the demand for index insurance. Ambiguity is introduced into the statistical relationship between the loss and the index because they are more difficult to guess than the occurrence of the loss and the index individually. Basis ambiguity lowers the demand for index insurance and increases the threshold to hold the index insurance. This is a possible explanation for the very low demand and participation in index insurance. Further, we consider how changes in ambiguity and ambiguity aversion influence the demand.

Keywords: Ambiguity aversion, Insurance demand, Statistical relationship

JEL Classification: D81, D91, G52

Suggested Citation

Yoichiro, Fujii and Osaki, Yusuke, Optimal Demand for Index Insurance Under Basis Ambiguity (March 26, 2020). Available at SSRN: https://ssrn.com/abstract=3561406 or http://dx.doi.org/10.2139/ssrn.3561406

Fujii Yoichiro

Meiji University - School of Commerce ( email )

United States

Yusuke Osaki (Contact Author)

Waseda University - School of Commerce ( email )

1-6-1 Nishiwaseda
Shinjuku, Tokyo 1698050
Japan

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