On modelling and pricing weather derivatives

Peter Alaton, Boualem Djehiche, David Stillberger

Research output: Contribution to journalArticlepeer-review

Abstract

The main objective of the work described is to find a pricing model for weather derivatives with payouts depending on temperature. Historical data are used to suggest a stochastic process that describes the evolution of the temperature. Since temperature is a non-tradable quantity, unique prices of contracts in an incomplete market are obtained using the market price of risk. Numerical examples of prices of some contracts are presented, using an approximation formula as well as Monte Carlo simulations.

Original languageEnglish (US)
Pages (from-to)1-20
Number of pages20
JournalApplied Mathematical Finance
Volume9
Issue number1
DOIs
StatePublished - Mar 2002

Keywords

  • Approximation Formula
  • Historical Data
  • Monte Carlo Simulation
  • Pricing Model
  • Stochastic Process
  • Weather Derivatives

ASJC Scopus subject areas

  • Finance
  • Applied Mathematics

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