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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| Format: | Article |
| Language: | English |
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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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| author | Birhan Taştan Azize Hayfavi |
| author_facet | Birhan Taştan Azize Hayfavi |
| author_sort | Birhan Taştan |
| collection | DOAJ |
| description | 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. |
| format | Article |
| id | doaj-art-dcb47f5343544a348513b919bf1ad44e |
| institution | Kabale University |
| issn | 1687-9309 1687-9317 |
| language | English |
| publishDate | 2017-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Advances in Meteorology |
| spelling | doaj-art-dcb47f5343544a348513b919bf1ad44e2025-02-03T06:06:57ZengWileyAdvances in Meteorology1687-93091687-93172017-01-01201710.1155/2017/39138173913817Modeling Temperature and Pricing Weather Derivatives Based on TemperatureBirhan Taştan0Azize Hayfavi1Department of Banking and Finance, Faculty of Management, Girne American University, 99428 Karmi Campus, University Drive, P.O. Box 5, Karaoglanoglu, Kyrenia, Northern Cyprus, Mersin 10, TurkeyDepartment of Financial Mathematics, Institute of Applied Mathematics, Middle East Technical University, Üniversiteler Mahallesi, Dumlupınar Bulvarı No. 1, Çankaya, 06800 Ankara, TurkeyThis 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.http://dx.doi.org/10.1155/2017/3913817 |
| spellingShingle | Birhan Taştan Azize Hayfavi Modeling Temperature and Pricing Weather Derivatives Based on Temperature Advances in Meteorology |
| title | Modeling Temperature and Pricing Weather Derivatives Based on Temperature |
| title_full | Modeling Temperature and Pricing Weather Derivatives Based on Temperature |
| title_fullStr | Modeling Temperature and Pricing Weather Derivatives Based on Temperature |
| title_full_unstemmed | Modeling Temperature and Pricing Weather Derivatives Based on Temperature |
| title_short | Modeling Temperature and Pricing Weather Derivatives Based on Temperature |
| title_sort | modeling temperature and pricing weather derivatives based on temperature |
| url | http://dx.doi.org/10.1155/2017/3913817 |
| work_keys_str_mv | AT birhantastan modelingtemperatureandpricingweatherderivativesbasedontemperature AT azizehayfavi modelingtemperatureandpricingweatherderivativesbasedontemperature |