Modelling and forecasting wind speed intensity for weather risk management
AbstractThe modelling of wind speed is a traditional topic in meteorological research, where the main interest is on the short-term forecast of wind speed intensity and direction. More recently, this theme has received some interest in the quantitative finance literature for its relationship with electricity production by wind farms. In fact, electricity producers are interested in long-range forecasts and simulation of wind speed for two main reasons: to evaluate the profitability of building a wind farm in a given location and to offset the risks associated with the variability of wind speed for an already operating wind farm. In this paper, we contribute to the increasing literature regarding environmental finance by comparing three approaches that are capable of forecasting and simulating the long run evolution of wind speed intensity (direction is not a concern, given that the recent turbines can rotate to follow wind direction): the Auto Regressive Gamma process, the Gamma Auto Regressive process, and the ARFIMA-FIGARCH model. We provide both in-sample and out-of-sample comparisons of the models, as well as some examples for the pricing of wind speed derivatives using a model-based Monte Carlo simulation approach.
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Bibliographic InfoPaper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0106.
Length: 38 pages
Date of creation: Jan 2010
Date of revision:
Gamma Auto Regressive; Auto Regressive Gamma; ARFIMA-FIGARCH; wind speed modelling; wind speed simulation;
Other versions of this item:
- Caporin, Massimiliano & Preś, Juliusz, 2012. "Modelling and forecasting wind speed intensity for weather risk management," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3459-3476.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-ENE-2010-01-23 (Energy Economics)
- NEP-FOR-2010-01-23 (Forecasting)
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