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Alternative Approaches to Weather Derivatives Pricing

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Date
2005-01
Dewey
Economie financière
Sujet
Weather derivatives; Acceptable risk; Actuarial risk; Incomplete markets
JEL code
G24; G11
Journal issue
Managerial Finance
Volume
31
Number
6
Publication date
01-2005
Article pages
46-72
Publisher
MCB Journals
URI
https://basepub.dauphine.fr/handle/123456789/1386
Collections
  • DRM : Publications
Metadata
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Author
Geman, Hélyette
Leonardi, Marie-Pascale
Type
Article accepté pour publication ou publié
Abstract (EN)
The goal of the paper is to analyse the various issues attached to the valuation of weather derivatives. We focus our study on temperature-related contracts since they are the most widely traded at this point and try to address the following questions: (i) should the quantity underlying the swaps or options contracts be defined as the temperature, degree-days or cumulative degree-days? This discussion is conducted both in terms of the robustness of the statistical modelling of the state variable and the mathematical valuation of the option (European versus Asian). (ii) What pricing approaches can tackle the market incompleteness generated by a non-tradable underlying when furthermore the market price of risk is hard to identify in other traded instruments and unlikely to be zero? We illustrate our study on a database of temperatures registered at Paris Le Bourget and compare the calls and puts prices obtained using the different methods most widely used in weather markets.

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