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Estimating sensitivities of temperature-based weather derivatives

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  • Wei Yuan
  • Ahmet Göncü
  • Giray Ökten

Abstract

Pricing of temperature-based weather derivatives has been studied in the literature; however, there is no analysis of the estimation of the sensitivities of weather derivatives in a stochastic model of temperatures. We use pathwise derivative and kernel methods to derive Monte Carlo estimators for the sensitivity (Greeks) of temperature-based weather derivatives. These sensitivities can be used by investors for choosing the most suitable weather contracts for partial hedging or speculation. Temperature data from New York, Atlanta and Chicago are used in the discussion of numerical results.

Suggested Citation

  • Wei Yuan & Ahmet Göncü & Giray Ökten, 2015. "Estimating sensitivities of temperature-based weather derivatives," Applied Economics, Taylor & Francis Journals, vol. 47(19), pages 1942-1955, April.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:19:p:1942-1955
    DOI: 10.1080/00036846.2014.1002888
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    References listed on IDEAS

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