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Modelling spatiotemporal variability of temperature

Listed author(s):
  • Xiaofeng Cao
  • Ostap Okhrin
  • Martin Odening
  • Matthias Ritter

Forecasting temperature in time and space is an important precondition for both the design of weather derivatives and the assessment of the hedging effectiveness of index based weather insur-ance. In this article, we show how this task can be accomplished by means of Kriging techniques. Moreover, we compare Kriging with a dynamic semiparametric factor model (DSFM) that has been recently developed for the analysis of high dimensional financial data. We apply both methods to comprehensive temperature data covering a large area of China and assess their performance in terms of predicting a temperature index at an unobserved location. The results show that the DSFM performs worse than standard Kriging techniques. Moreover, we show how geographic basis risk inherent to weather derivatives can be mitigated by regional diversification.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2014-020.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2014-020.

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Length: 25 pages
Date of creation: Feb 2014
Handle: RePEc:hum:wpaper:sfb649dp2014-020
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  15. Xiaohui Deng & Barry J. Barnett & Dmitry V. Vedenov & Joe W. West, 2007. "Hedging dairy production losses using weather-based index insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 36(2), pages 271-280, March.
  16. Park, Byeong U. & Mammen, Enno & Härdle, Wolfgang & Borak, Szymon, 2009. "Time Series Modelling With Semiparametric Factor Dynamics," Journal of the American Statistical Association, American Statistical Association, vol. 104(485), pages 284-298.
  17. Wolfgang Karl Härdle & Brenda López Cabrera & Ostap Okhrin & Weining Wang, 2011. "Localising temperature risk," SFB 649 Discussion Papers SFB649DP2011-001, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  18. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Other Operational Studies 14434, The World Bank.
  19. Barbara Choroś-Tomczyk & Wolfgang Karl Härdle & Ostap Okhrin, 2013. "CDO Surfaces Dynamics," SFB 649 Discussion Papers SFB649DP2013-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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