Spatial Risk Premium on Weather Derivatives and Hedging Weather Exposure in Electricity
Due to dependency of energy demand on temperature, weather derivatives enable the effective hedging of temperature related fluctuations. However, temperature varies in space and time and therefore the contingent weather derivatives also vary. The spatial derivative price distribution involves a risk premium. We examine functional principal components of temperature variation for this spatial risk premium. We employ a pricing model for temperature derivatives based on dynamics modelled via a vectorial Ornstein-Uhlenbeck process with seasonal variation. We use an analytical expression for the risk premia depending on variation curves of temperature in the measurement period. The dependence is exploited by a functional principal component analysis of the curves. We compute risk premia on cumulative average temperature futures for locations traded on CME and fit to it a geographically weighted regression on functional principal component scores. It allows us to predict risk premia for nontraded locations and to adopt, on this basis, a hedging strategy, which we illustrate in the example of Leipzig.
|Date of creation:||Mar 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Spandauer Str. 1,10178 Berlin|
Web page: http://sfb649.wiwi.hu-berlin.de
More information through EDIRC
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.:
- Esra Akdeniz Duran & Wolfgang Karl HÃ¤rdle & Maria Osipenko, 2011.
"Difference based Ridge and Liu type Estimators in Semiparametric Regression Models,"
SFB 649 Discussion Papers
SFB649DP2011-014, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Akdeniz Duran, Esra & Härdle, Wolfgang Karl & Osipenko, Maria, 2012. "Difference based ridge and Liu type estimators in semiparametric regression models," Journal of Multivariate Analysis, Elsevier, vol. 105(1), pages 164-175.
- Donald H. Rosenthal & Howard K. Gruenspecht & Emily A. Moran, 1995. "Effects of Global Warming on Energy Use for Space Heating and Cooling in the United States," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 77-96.
When requesting a correction, please mention this item's handle: RePEc:hum:wpaper:sfb649dp2011-013. 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: (RDC-Team)
If references are entirely missing, you can add them using this form.