Forecast based Pricing of Weather Derivatives
Forecasting based pricing of Weather Derivatives (WDs) is a new approach in valuation of contingent claims on nontradable underlyings. Standard techniques are based on historical weather data. Forward-looking information such as meteorological forecasts or the implied market price of risk (MPR) are often not incorporated. We adopt a risk neutral approach (for each location) that allows the incorporation of meteorological forecasts in the framework of WD pricing. We study weather Risk Premiums (RPs) implied from either the information MPR gain or the meteorological forecasts. The size of RPs is interesting for investors and issuers of weather contracts to take advantages of geographic diversification, hedging effects and price determinations. By conducting an empirical analysis to London and Rome WD data traded at the Chicago Mercantile Exchange (CME), we find out that either incorporating the MPR or the forecast outperforms the standard pricing techniques.
|Date of creation:||Mar 2012|
|Contact details of provider:|| Postal: Spandauer Str. 1,10178 Berlin|
Web page: http://sfb649.wiwi.hu-berlin.de
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- 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.
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- Sean D. Campbell & Francis X. Diebold, 2005.
"Weather Forecasting for Weather Derivatives,"
Journal of the American Statistical Association,
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- 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.
- Sean D. Campbell & Francis X. Diebold, 2003. "Weather Forecasting for Weather Derivatives," NBER Working Papers 10141, National Bureau of Economic Research, Inc.
- Diebold, Francis X. & Inoue, Atsushi, 2001.
"Long memory and regime switching,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 131-159, November.
- 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.
- Wolfgang Härdle & Brenda López Cabrera, 2009. "Implied Market Price of Weather Risk," SFB 649 Discussion Papers SFB649DP2009-001, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Dorfleitner, Gregor & Wimmer, Maximilian, 2010. "The pricing of temperature futures at the Chicago Mercantile Exchange," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1360-1370, June.
- Matthias Ritter & Oliver Mußhoff & Martin Odening, 2010. "Meteorological forecasts and the pricing of weather derivatives," SFB 649 Discussion Papers SFB649DP2010-043, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- 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.
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