Is temperature-index derivative suitable for China?

Hairong Cui, Ying Zhou, Michael D. Dzandu, Yinshan Tang and Xunfa Lu

Physica A: Statistical Mechanics and its Applications, 2019, vol. 536, issue C

Abstract: In this paper, we assessed the suitability of temperature derivatives for China through modeling. We assumed that if the physical dynamics of temperature of some cities are identical, then the same types of temperature derivatives can be used in these cities. Nearly twenty years temperature data of forty-seven cities with traded temperature derivatives on the Chicago Mercantile Exchange Group (CME) and seven Chinese cities were collected and analyzed in a two-step approach. Firstly, the AR-EGARCH model capturing the shock asymmetry of the volatility of temperature is used to simulate the dynamics of temperature of the cities. Secondly, the temperature of the cities are classified through cluster analysis based on model parameters from the AR-EGARCH model. The results showed that the fitting effect of the AR-EGARCH model is very good, and only a few cities did not display the shock asymmetry. The model for Nanjing fitted well into one of the categories of the cities in the CME; but the other six Chinese cities belong to new categories, which are different from the cities in the CME. We concluded that HDD and CAT in Europe and CAT∗ in Japan can be used directly in Nanjing, but the existing temperature derivatives in CME were unsuitable for the other six Chinese cities. Recommendations for the establishment of weather derivatives market in China have been proposed.

Keywords: Weather risk; Temperature derivatives; Cluster analysis; Shock asymmetry; AR-EGARCH model (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437119305576
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

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:eee:phsmap:v:536:y:2019:i:c:s0378437119305576

DOI: 10.1016/j.physa.2019.04.195

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().