Modeling Temperature and Pricing Weather Derivatives Based on Temperature
This study first proposes a temperature model to calculate the temperature indices upon which temperature-based derivatives are written. The model is designed as a mean-reverting process driven by a Levy process to represent jumps and other features of temperature. Temperature indices are mainly mea...
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| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Wiley
2017-01-01
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| Series: | Advances in Meteorology |
| Online Access: | http://dx.doi.org/10.1155/2017/3913817 |
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| Summary: | This study first proposes a temperature model to calculate the temperature indices upon which temperature-based derivatives are written. The model is designed as a mean-reverting process driven by a Levy process to represent jumps and other features of temperature. Temperature indices are mainly measured as deviations from a base temperature, and, hence, the proposed model includes jumps because they may constitute an important part of this deviation for some locations. The estimated value of a temperature index and its distribution in this model apply an inversion formula to the temperature model. Second, this study develops a pricing process over calculated index values, which returns a customized price for temperature-based derivatives considering that temperature has unique effects on every economic entity. This personalized price is also used to reveal the trading behavior of a hypothesized entity in a temperature-based derivative trade with profit maximization as the objective. Thus, this study presents a new method that does not need to evaluate the risk-aversion behavior of any economic entity. |
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| ISSN: | 1687-9309 1687-9317 |