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Pricing Weather Derivative : An Equilibrium Approach

Author

Listed:
  • Cao, M.
  • Wei, J.

Abstract

This paper proposes and implements as equilibrium framework for valuing weather derivatives. We generalize the Lucas Model of 1978 to include the daily temperature as a fundamental variable in the economy.

Suggested Citation

  • Cao, M. & Wei, J., 1999. "Pricing Weather Derivative : An Equilibrium Approach," Rotman School of Management - Finance 99-002, Rotman School of Management, University of Toronto.
    • Handle: RePEc:fth:rotfin:99-002
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    Citations

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    Cited by:

    1. Lee, Yongheon & Oren, Shmuel S., 2009. "An equilibrium pricing model for weather derivatives in a multi-commodity setting," Energy Economics, Elsevier, vol. 31(5), pages 702-713, September.
    2. Musshoff, Oliver & Odening, Martin & Xu, Wei, 2005. "Zur Bewertung von Wetterderivaten als innovative Risikomanagementinstrumente in der Landwirtschaft," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 54(04), pages 1-13.
    3. Shu Ling Chiang & Ming Shann Tsai, 2019. "Valuation of an option using non-parametric methods," Review of Derivatives Research, Springer, vol. 22(3), pages 419-447, October.
    4. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2002. "Weather Derivatives: Managing Risk With Market-Based Instruments," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19074, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Karyl Leggio & Donald Lien, 2002. "Hedging gas bills with weather derivatives," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(1), pages 88-100, March.
    6. Mark Manfredo & Timothy Richards, 2009. "Hedging with weather derivatives: a role for options in reducing basis risk," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 87-97.
    7. Musshoff, Oliver & Hirschauer, Norbert, 2008. "Hedging von Mengenrisiken in der Landwirtschaft – Wie teuer dürfen „ineffektive“ Wetterderivate sein?," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 57(05), pages 1-12.
    8. Wolfgang Karl Härdle & Maria Osipenko, 2017. "A Dynamic Programming Approach for Pricing Weather Derivatives under Issuer Default Risk," IJFS, MDPI, vol. 5(4), pages 1-18, October.
    9. Aur'elien Alfonsi & Nerea Vadillo, 2023. "Risk valuation of quanto derivatives on temperature and electricity," Papers 2310.07692, arXiv.org.

    More about this item

    Keywords

    WEATHER ; ENERGY ; DEMAND ; EVALUATION;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

    Statistics

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