Stochastic Modelling of Temperature Variations with a View Towards Weather Derivatives
Daily average temperature variations are modelled with a mean-reverting Ornstein-Uhlenbeck process driven by a generalized hyperbolic Levy process and having seasonal mean and volatility. It is empirically demonstrated that the proposed dynamics fits Norwegian temperature data quite successfully, and in particular explains the seasonality, heavy tails and skewness observed in the data. The stability of mean-reversion and the question of fractionality of the temperature data are discussed. The model is applied to derive explicit prices for some standardized futures contracts based on temperature indices and options on these traded on the Chicago Mercantile Exchange (CME).
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 12 (2005)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAMF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAMF20|
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.:
- Neil Shephard, 2005.
Economics Series Working Papers
2005-W17, University of Oxford, Department of Economics.
- Sean D. Campbell & Francis X. Diebold, 2003.
"Weather Forecasting for Weather Derivatives,"
NBER Working Papers
10141, National Bureau of Economic Research, Inc.
- Campbell, Sean D. & Diebold, Francis X., 2004. "Weather forecasting for weather derivatives," CFS Working Paper Series 2004/10, Center for Financial Studies (CFS).
- 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.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- 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.
- Ole E. Barndorff-Nielsen, 1997. "Processes of normal inverse Gaussian type," Finance and Stochastics, Springer, vol. 2(1), pages 41-68.
When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:12:y:2005:i:1:p:53-85. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.