Weather derivatives valuation and market price of weather risk

Cao, Minghui; Wei, Jason Zhanshun

doi:10.1002/fut.20122

Cited by 184 publications

(189 citation statements)

References 9 publications

(8 reference statements)

Supporting

Mentioning

176

Contrasting

Unclassified

Order By: Relevance

“…The results are consistent with the results of Wei (2004), andChang (2009). When the correlation parameter Φ<0, CDD option prices are higher than those under the risk-neutral world.…”

Section: The Estimation Of Market Price Of Risksupporting

confidence: 89%

“…Applying the Campbell and Diebold (2002)'s time series model and Cao and Wei (2004)'s extended Lucas (1978) pure exchange economy model to the 32 years' temperature data in the city of Guangzhou, China, this paper derived the equilibrium prices for CDD forward, call and put options. The estimation of the market price of risk over a range of risk aversion parameters implies that the risk premium can be an important part of derivatives price and the market price of risk affects options much more than forwards.…”

Section: Discussionmentioning

confidence: 99%

“…To obtain the market price of risk attached to the weather variable, the extended Lucas (1978) pure exchange economy model proposed by Cao and Wei (2004) is employed. The main assumption is that the fundamental uncertainties in the economy are driven by the aggregate dividend δ(t) and the temperature Y (t).…”

Section: Pricing Weather Derivativesmentioning

confidence: 99%

“…The pricing mechanisms suggested in the literature (Alaton et al, 2002;Benth and Benth, 2005;Campbell and Diebold, 2002;Cao and Wei, 2004) are various, burn analysis, index modeling approaches, daily weather variable process models, and the so called daily simulation approaches to name a few. Burn analysis valuates a derivative simply by averaging all payoffs that would have been realized in the past.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Pricing weather derivatives: An application to the electrical utility

Zou¹,

Lee²

2012

Journal of the Korean Data and Information Science Society

View full text Add to dashboard Cite

Weather derivatives designed to manage casual changes of weather, as opposed to catastrophic risks of weather, are relatively a new class of financial instruments. There are still many theoretical and practical challenges to the effective use of these instruments. The objective of this paper is to develop a pricing approach for valuing weather derivatives and presents a case study that is practical enough to be used by the risk managers of electrical utility firms. Utilizing daily average temperature data of Guangzhou, China from 1 st January 1978 to 31 st December 2010, this paper adopted a univariate time series model to describe weather behavior dynamics and calculates equilibrium prices for weather futures and options for an electrical utility firm in the region. The results imply that the risk premium is an important part of derivatives prices and the market price of risk affects option values much more than forward prices. It also demonstrates that weather innovation as well as weather risk management significantly affect the utility's financial outcomes.

show abstract

“…The results are consistent with the results of Wei (2004), andChang (2009). When the correlation parameter Φ<0, CDD option prices are higher than those under the risk-neutral world.…”

Section: The Estimation Of Market Price Of Risksupporting

confidence: 89%

Section: Discussionmentioning

confidence: 99%

Section: Pricing Weather Derivativesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Pricing weather derivatives: An application to the electrical utility

Zou¹,

Lee²

2012

Journal of the Korean Data and Information Science Society

View full text Add to dashboard Cite

show abstract

“…Cao and Wei [12] use the approach to model temperature evolution in five US cities. Higher-order AR models have been proposed and analysed by Benth et al [28,7] for data in Sweden and Lithuania.…”

Section: A General Model For Temperature Dynamicsmentioning

confidence: 99%

A critical view on temperature modelling for application in weather derivatives markets

Benth¹,

Benth²

2012

Energy Economics

View full text Add to dashboard Cite

In this paper we present a stochastic model for daily average temperature. The model contains seasonality, a low-order autoregressive component and a variance describing the heteroskedastic residuals.The model is estimated on daily average temperature records from Stockholm (Sweden). By comparing the porposed model with the popular model of Campbell and Diebold (2005), we point out some important issues to be adressed when modelling the temperature for application in weather derivatives market.

show abstract

Navigating financial and supply reliability tradeoffs in regional drought management portfolios

Zeff

Kasprzyk

Herman

et al. 2014

Water Resources Research

104

View full text Add to dashboard Cite

Rising development costs and growing concerns over environmental impacts have led many communities to explore more diversified water management strategies. These ''portfolio''-style approaches integrate existing supply infrastructure with other options such as conservation measures or water transfers. Diversified water supply portfolios have been shown to reduce the capacity and costs required to meet demand, while also providing greater adaptability to changing hydrologic conditions. However, this additional flexibility can also cause unexpected reductions in revenue (from conservation) or increased costs (from transfers). The resulting financial instability can act as a substantial disincentive to utilities seeking to implement more innovative water management techniques. This study seeks to design portfolios that employ financial tools (e.g., contingency funds and index insurance) to reduce fluctuations in revenues and costs, allowing these strategies to achieve improved performance without sacrificing financial stability. This analysis is applied to the development of coordinated regional supply portfolios in the ''Research Triangle'' region of North Carolina, an area comprising four rapidly growing municipalities. The actions of each independent utility become interconnected when shared infrastructure is utilized to enable interutility transfers, requiring the evaluation of regional tradeoffs in up to five performance and financial objectives. Diversified strategies introduce significant tradeoffs between achieving reliability goals and introducing burdensome variability in annual revenues and/or costs. Financial mitigation tools can mitigate the impacts of this variability, allowing for an alternative suite of improved solutions. This analysis provides a general template for utilities seeking to navigate the tradeoffs associated with more flexible, portfolio-style management approaches.

show abstract

Weather derivatives valuation and market price of weather risk

Cited by 184 publications

References 9 publications

Pricing weather derivatives: An application to the electrical utility

Pricing weather derivatives: An application to the electrical utility

A critical view on temperature modelling for application in weather derivatives markets

Navigating financial and supply reliability tradeoffs in regional drought management portfolios

Contact Info

Product

Resources

About