Insurance Contracts for Hedging Wind Power Uncertainty

Guglielmo D’Amico, Fulvio Gismondi and Filippo Petroni
Additional contact information
Guglielmo D’Amico: Department of Economics, “G. D’Annunzio” University of Chieti-Pescara, 66013 CHIETI, Italy
Fulvio Gismondi: Department of Economic and Business Science, “Guglielmo Marconi” University of Rome, 00185 Rome, Italy
Filippo Petroni: Department of Management, Marche Polytechnic University, 60121 Ancona, Italy

Mathematics, 2020, vol. 8, issue 8, 1-16

Abstract: This paper presents an insurance contract that the supplier of wind power may subscribe to with an insurance company in order to immunize his/her revenue against the volatility of wind power and prices. Based on empirical evidence, we found that wind power and electricity prices are correlated. Then, we adopted a joint stochastic process to model both time series, which is based on indexed semi-Markov chains for the wind power generation process and on a general Markovian process for the electricity price process. Using a joint stochastic model allows the insurance company to compute the fair premium that the wind power producer has to pay in order to hedge the risk against inadequate revenues. Recursive type equations are obtained for the prospective mathematical reserves of the insurance contract. The model and the validity of the results are illustrated through a real data application.

Keywords: semi-Markov processes; insurance contract; wind energy; energy prices; copula function (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mdpi.com/2227-7390/8/8/1376/pdf (application/pdf)
https://www.mdpi.com/2227-7390/8/8/1376/ (text/html)

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:gam:jmathe:v:8:y:2020:i:8:p:1376-:d:400092

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().