On arbitrage-free pricing of weather derivatives based on fractional Brownian motion

Fred Espen Benth

Applied Mathematical Finance, 2003, vol. 10, issue 4, 303-324

Abstract: We derive an arbitrage-free pricing dynamics for claims on temperature, where the temperature follows a fractional Ornstein-Uhlenbeck process. Using a fractional white noise calculus, one can express the dynamics as a special type of conditional expectation not coinciding with the classical one. Using a Fourier transformation technique, explicit expressions are derived for claims of European and average type, and it is shown that these pricing formulas are solutions of certain Black and Scholes partial differential equations. Our results partly confirm a conjecture made by Brody, Syroka and Zervos.

Keywords: Fractional Brownian motion; weather derivatives; arbitrage; option pricing; partial-differential equations; white noise analysis (search for similar items in EconPapers)
Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/1350486032000174628 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:10:y:2003:i:4:p:303-324

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/1350486032000174628

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().