EconPapers    
Economics at your fingertips  
 

Quantifying spatial basis risk for weather index insurance

Michael T. Norton, Calum Turvey () and Daniel Osgood

Journal of Risk Finance, 2012, vol. 14, issue 1, 20-34

Abstract: Purpose - The purpose of this paper to develop an empirical methodology for managing spatial basis risk in weather index insurance by studying the fundamental causes for differences in weather risk between distributed locations. Design/methodology/approach - The paper systematically compares insurance payouts at nearby locations based on differences in geographical characteristics. The geographic characteristics include distance between stations and differences in altitude, latitude, and longitude. Findings - Geographic differences are poor predictors of payouts. The strongest predictor of payout at a given location is payout at nearby location. However, altitude has a persistent effect on heat risk and distance between stations increases payout discrepancies for precipitation risk. Practical implications - Given that payouts in a given area are highly correlated, it may be possible to insure multiple weather stations in a single contract as a “risk portfolio” for any one location. Originality/value - Spatial basis risk is a fundamental problem of index insurance and yet is still largely unexplored in the literature.

Keywords: Insurance; Precipitation; Rainfall; Index insurance; Weather derivatives; Spatial basis risk; Basis risk (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://www.emeraldinsight.com/10.1108/152659413112 ... RePEc&WT.mc_id=RePEc (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:eme:jrfpps:v:14:y:2012:i:1:p:20-34

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://emeraldgroupp ... /journals.htm?id=jrf

Access Statistics for this article

Journal of Risk Finance is currently edited by Bonnie Buchanan

More articles in Journal of Risk Finance from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

 
Page updated 2020-12-23
Handle: RePEc:eme:jrfpps:v:14:y:2012:i:1:p:20-34