Forecast based pricing of weather derivatives

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2012-027

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: Other ; Financial Institutions and Services: Other ; Insurance; Insurance Companies; Actuarial Studies ; Economic History: Financial Markets and Institutions: Europe: Pre-1913 ; Economic History: Agriculture, Natural Resources, Environment, and Extractive Industries: Europe: Pre-1913 ; Environmental Economics: Other
• Subject: weather derivatives ; seasonal variation ; temperature ; risk premia ; Wetter ; Finanzderivat ; Börsenkurs ; Optionspreistheorie ; Meteorologie ; Prognoseverfahren ; Theorie ; Schätzung ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Härdle, Wolfgang Karl ; López-Cabrera, Brenda ; Ritter, Matthias
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/56760
• Last update: 10.03.2025, 11:43 AM CET