SINGLE FACTOR STOCHASTIC MODELS WITH SEASONALITY APPLIED TO UNDERLYING WEATHER DERIVATIVES VARIABLES

Enric Valor, Hipolit Torro and Vicente Meneu
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Enric Valor: Universitat de València
Vicente Meneu: Universitat de València

Working Papers. Serie EC from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: This paper estimates single factor stochastic models describing daily air temperature behaviour. We modify classical financial models to reflect temperature seasonality and fit them to a time series representing temperatures in Spain. The estimated models are used in Montecarlo simulations to obtain heating and cooling degree-days, which are used as an underlying reference in weather derivatives. The final goal of this work is to obtain an insight into weather derivative valuation, and so making it easier to manage economic activity risks closely related to temperature (i.e. oil, gas and electricity prices and volumes). En este trabajo se estiman modelos estocásticos unifactoriales que describen elcomportamiento de la temperatura del aire de un índice representativo de la Españapeninsular. Los modelos más utilizados en finanzas se adaptan para incorporar elcomportamiento estacional de la variable temperatura. El objetivo de este trabajo es obtenerresultados que permitan avanzar en la valoración de activos derivados sobre climatología.Este tipo de derivados permiten gestionar riesgos de la actividad económica estrechamenterelacionados con la temperatura (por ejemplo, los riesgos de precio y volumen del gas y laelectricidad). Con los modelos estimados se realiza un ejercicio de simulación de Montecarlopara obtener los grados día frío y los grados día calor que son las referencias subyacentes enlos contratos de meteorología.

Keywords: Grados Día Frío; Energía; Grados Día Calor; Estacionalidad; Modelos estocásticos y Derivados de la meteorología. Cooling Degree-days; Energy; Heating Degree-days; Seasonality; Stochastic Models; Weather Derivatives. (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2001-11
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Citations: View citations in EconPapers (5)

Published by Ivie

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http://www.ivie.es/downloads/docs/wpasec/wpasec-2001-22.pdf Fisrt version / Primera version, 2001 (application/pdf)

Related works:
Journal Article: Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasec:2001-22

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