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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- Fred ESPEN Benth & Jurate saltyte Benth, 2007. "The volatility of temperature and pricing of weather derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 7(5), pages 553-561.
- repec:cup:cbooks:9780521843713 is not listed on IDEAS
- Peter Alaton & Boualem Djehiche & David Stillberger, 2002. "On modelling and pricing weather derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 1-20.
- 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.
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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.
- A. Zapranis & A. Alexandridis, 2008. "Modelling the Temperature Time-dependent Speed of Mean Reversion in the Context of Weather Derivatives Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(4), pages 355-386.
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