A critical view on temperature modelling for application in weather derivatives markets
In this paper we present a stochastic model for daily average temperature. The model contains seasonality, a low-order autoregressive component and a variance describing the heteroskedastic residuals. The model is estimated on daily average temperature records from Stockholm (Sweden). By comparing the proposed model with the popular model of Campbell and Diebold (2005), we point out some important issues to be addressed when modelling the temperature for application in weather derivatives market.
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- Sean D. Campbell & Francis X. Diebold, 2005.
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- Fred Benth & Wolfgang Karl HÃ¤rdle & Brenda LÃ³pez Cabrera, 2009. "Pricing of Asian temperature risk," SFB 649 Discussion Papers SFB649DP2009-046, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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- Jewson,Stephen & Brix,Anders, 2005. "Weather Derivative Valuation," Cambridge Books, Cambridge University Press, number 9780521843713, June.
- FRED ESPEN BENTH & JŪRATĖ SALTYTĖ BENTH & STEEN KOEKEBAKKER, 2007. "Putting a Price on Temperature," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 34(4), pages 746-767.
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- Fred Espen Benth & Jurate Saltyte-Benth, 2005. "Stochastic Modelling of Temperature Variations with a View Towards Weather Derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(1), pages 53-85.
- Dorje Brody & Joanna Syroka & Mihail Zervos, 2002. "Dynamical pricing of weather derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 2(3), pages 189-198.
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