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Single Factor Stochastic Models With Seasonality Applied To Underlying Weather Derivatives Variables

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Author Info
Enric Valor (Universitat de València)
Hipòlit Torró (Universitat de València)
Vicente Meneu (Universitat de València)

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Abstract

This paper estimates single factor stochastic models describing daily air temperature behaviour. We modify classical financial models to reflect temperature seasonality and fit them to a time series representing temperatures in Spain. The estimated models are used in Montecarlo simulations to obtain heating and cooling degree-days, which are used as an underlying reference in weather derivatives. The final goal of this work is to obtain an insight into weather derivative valuation, and so making it easier to manage economic activity risks closely related to temperature (i.e. oil, gas and electricity prices and volumes). En este trabajo se estiman modelos estocásticos unifactoriales que describen elcomportamiento de la temperatura del aire de un índice representativo de la Españapeninsular. Los modelos más utilizados en finanzas se adaptan para incorporar elcomportamiento estacional de la variable temperatura. El objetivo de este trabajo es obtenerresultados que permitan avanzar en la valoración de activos derivados sobre climatología.Este tipo de derivados permiten gestionar riesgos de la actividad económica estrechamenterelacionados con la temperatura (por ejemplo, los riesgos de precio y volumen del gas y laelectricidad). Con los modelos estimados se realiza un ejercicio de simulación de Montecarlopara obtener los grados día frío y los grados día calor que son las referencias subyacentes enlos contratos de meteorología.

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Publisher Info
Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie EC with number 2001-22.

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Length: 23 pages
Date of creation: Nov 2001
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasec:2001-22

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Related research
Keywords: Grados Día Frío; Energía; Grados Día Calor; Estacionalidad; Modelos estocásticos y Derivados de la meteorología. Cooling Degree-days; Energy; Heating Degree-days; Seasonality; Stochastic Models; Weather Derivatives.;

Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Peirson, John & Henley, Andrew, 1994. "Electricity load and temperature : Issues in dynamic specification," Energy Economics, Elsevier, vol. 16(4), pages 235-243, October. [Downloadable!] (restricted)
  2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November. [Downloadable!] (restricted)
  3. Henley, Andrew & Peirson, John, 1998. "Residential energy demand and the interaction of price and temperature: British experimental evidence," Energy Economics, Elsevier, vol. 20(2), pages 157-171, April. [Downloadable!] (restricted)
  4. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  5. Brennan, Michael J. & Schwartz, Eduardo S., 1982. "An Equilibrium Model of Bond Pricing and a Test of Market Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(03), pages 301-329, September. [Downloadable!]
  6. Manuel Moreno & Juan I. Peña, 1996. "On the Term Structure of Interbank Interest Rates: Jump-Diffusion Processes and Option Pricing," Economics Working Papers 191, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sean D. Campbell & Francis X. Diebold, 2002. "Weather Forecasting for Weather Derivatives," Center for Financial Institutions Working Papers 02-42, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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