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Extracting Information from the Market to Price the Weather Derivatives

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Author Info

  • Hélène Hamisultane

    ()
    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

Abstract

Weather derivatives were first launched in 1996 in the United-States to allow companies to protect themselves against weather fluctuations. Even now their valuation still remains tricky. Because their underlying is not a traded asset, the weather options cannot be priced by using the Black and Scholes formula. Other pricing methods were proposed but they cannot be calibrated to the market since there are no available weather option price. However, quoted prices exist for the weather futures. The purpose of this paper is to extract two types of information from these prices, the risk-neutral distribution and the market price of risk, to value the weather derivatives. The prices are calculated by assuming that the daily average temperature obeys a mean-reverting jump-EGARCH process since it is shown that the temperature is not normally distributed and exhibits a time-varying volatility.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00079192.

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Date of creation: 2007
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Handle: RePEc:hal:wpaper:halshs-00079192

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00079192/en/
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Related research

Keywords: weather derivatives; incomplete market; mean-reverting jump diffusion process; EGARCH process; PIDE; inversion problem;

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Cited by:
  1. Wolfgang Härdle & Brenda López Cabrera, 2009. "Implied Market Price of Weather Risk," SFB 649 Discussion Papers SFB649DP2009-001, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Ahčan, Aleš, 2012. "Statistical analysis of model risk concerning temperature residuals and its impact on pricing weather derivatives," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 131-138.
  3. Lee, Yongheon & Oren, Shmuel S., 2009. "An equilibrium pricing model for weather derivatives in a multi-commodity setting," Energy Economics, Elsevier, vol. 31(5), pages 702-713, September.
  4. Hélène Hamisultane, 2006. "Pricing the Weather Derivatives in the Presence of Long Memory in Temperatures," Working Papers halshs-00079197, HAL.

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