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Weather Derivatives, Spatial Aggregation, and Systemic Risk: Implications for Reinsurance Hedging

  • Woodard, Joshua D.
  • Garcia, Philip
Registered author(s):

    Previous studies identify limited potential efficacy of weather derivatives in hedging agricultural exposures. In contrast to earlier studies which investigate the problem at low levels of aggregation, we find that better weather hedging opportunities may exist at higher levels of spatial aggregation. Aggregating production exposures reduces idiosyncratic risk, leaving a greater proportion of the total risk in the form of systemic weather risk which can be effectively hedged using relatively simple weather derivatives. The aggregation effect suggests that the potential for weather derivatives in agriculture may be greater than previously thought, particularly for aggregators of risk such as reinsurers.

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    File URL: http://purl.umn.edu/36705
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    Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

    Volume (Year): 33 (2008)
    Issue (Month): 01 (April)
    Pages:

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    Handle: RePEc:ags:jlaare:36705
    Contact details of provider: Web page: http://waeaonline.org/

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    1. Mason, Chuck & Hayes, Dermot J. & Lence, Sergio H., 2003. "Systemic Risk in U.S. Crop Reinsurance Programs," Staff General Research Papers 1944, Iowa State University, Department of Economics.
    2. Keith H. Coble, 2004. "The joint effect of government crop insurance and loan programmes on the demand for futures hedging," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 31(3), pages 309-330, September.
    3. Wolfram Schlenker & W. Michael Hanemann & Anthony C. Fisher, 2006. "The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditions," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 113-125, February.
    4. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
    5. John Duncan & Robert J. Myers, 2000. "Crop Insurance under Catastrophic Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 842-855.
    6. Dixon, Bruce L. & Hollinger, Steven E. & Garcia, Philip & Tirupattur, Viswanath, 1994. "Estimating Corn Yield Response Models To Predict Impacts Of Climate Change," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(01), July.
    7. Kevin Dowd & David Blake, 2006. "After VaR: The Theory, Estimation, and Insurance Applications of Quantile-Based Risk Measures," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 193-229.
    8. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management.
    9. Robert K. Kaufmann & Seth E. Snell, 1997. "A Biophysical Model of Corn Yield: Integrating Climatic and Social Determinants," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 178-190.
    10. Hayes, Dermot J. & Lence, Sergio H. & Mason, Chuck, 2003. "Could the Government Manage Its Exposure to Crop Reinsurance Risk?," Staff General Research Papers 11287, Iowa State University, Department of Economics.
    11. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(03), December.
    12. Joseph W. Glauber, 2004. "Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1179-1195.
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