Weather Derivatives and the Market Price of Risk

Document Type

Article

Digital Object Identifier (DOI)

10.31390/josa.1.3.07

Journal Title

Journal of Stochastic Analysis

Publication Date

2020

Abstract

Weather derivatives are becoming prominent features in multi-asset class portfolios of alternative risk. The pricing of these securities is nonetheless challenging since it requires an incomplete market framework. We discuss pricing formulas for temperature-based weather derivative options, constructing mean reverting stochastic models for describing the dynamics of daily temperature with a constant speed of mean reversion for three cities. Truncated Fourier series are used to model the volatility, and assuming a constant market price of risk, we introduce a novel approach for estimating this constant, using Monte Carlo simulations

Comments

This article is available due to the hard work of the Louisiana State University (LSU) Scholarly Repository. 

Publisher Statement

Journal of Stochastic Analysis (JOSA) is an online open access journal that aims to present original research papers of high quality in stochastic analysis (both theory and applications) and emphasizes the global development of the scientific community. 

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