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Weather Risk Hedging in the European Markets and International Investment Diversification

Author

Listed:
  • Charles C Yang

    (Department of Finance, Florida Atlantic University, Boca Raton, Florida, U.S.A)

  • Linda Shihong Li

    (NCCI Holdings, Inc., Boca Raton, Florida, U.S.A.)

  • Min-Ming Wen

    (Department of Finance and Law, California State University, Los Angeles, California, U.S.A.)

Abstract

This article analyses weather risk hedging efficiency in three European countries using weather derivatives traded at Chicago Mercantile Exchange (CME) and explores the potential of weather derivatives as a new investment asset to further diversify investors’ portfolios. The results document that the CME European weather contracts are generally effective in hedging the temperature risk in the three European countries. However, for a specific country, weather risk hedging using other countries’ weather indexes is generally not effective. Zero or little correlation among international weather indexes and stock market indexes indicates that weather derivatives should be an efficient investment diversifier. This research provides important insights to both weather risk hedgers and investors.

Suggested Citation

  • Charles C Yang & Linda Shihong Li & Min-Ming Wen, 2011. "Weather Risk Hedging in the European Markets and International Investment Diversification," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 36(1), pages 74-94, June.
    • Handle: RePEc:pal:genrir:v:36:y:2011:i:1:p:74-94
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    Citations

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    Cited by:

    1. Rosella Castellano & Roy Cerqueti & Giulia Rotundo, 2020. "Exploring the financial risk of a temperature index: a fractional integrated approach," Annals of Operations Research, Springer, vol. 284(1), pages 225-242, January.
    2. Haruyoshi Ito & Jing Ai & Akihiko Ozawa, 2016. "Managing Weather Risks: The Case of J. League Soccer Teams in Japan," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(4), pages 877-912, December.
    3. Å tulec, Ivana & Petljak, Kristina & Naletina, Dora, 2019. "Weather impact on retail sales: How can weather derivatives help with adverse weather deviations?," Journal of Retailing and Consumer Services, Elsevier, vol. 49(C), pages 1-10.
    4. Martin Eling, 2013. "Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2011 Update," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 16(1), pages 35-46, March.
    5. Ivana Štulec, 2017. "Effectiveness of Weather Derivatives as a Risk Management Tool in Food Retail: The Case of Croatia," IJFS, MDPI, vol. 5(1), pages 1-15, January.

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