Managing Meteorological Risk through Expected Shortfall

Silvana Stefani, Gleda Kutrolli, Enrico Moretto and Sergei Kulakov
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Silvana Stefani: Dipartimento di Discipline Matematiche, Finanza Matematica ed Econometria, Università Cattolica del Sacro Cuore, via Necchi, 9, 20123 Milano, Italy
Gleda Kutrolli: Dipartimento di Statistica e Metodi Quantitativi, Università di Milano-Bicocca, Piazza dell’Ateneo Nuovo, 1, 20126 Milano, Italy
Sergei Kulakov: House of Energy Markets and Finance, University of Duisburg-Essen, Berliner Platz 6-8, 45127 Duisburg, Germany

Risks, 2020, vol. 8, issue 4, 1-23

Abstract: This paper focuses on weather derivatives as efficient risk management instruments and proposes a more advanced approach for their pricing. An “hybrid” contract is introduced, combining insurance properties, specifically tailored for the region under study and introducing Value-at-Risk (VaR) and Expected Shortfall (ES) as appropriate measures for the strike price. The numerical results show that VaR and ES are both efficient ways for managing the so-called Tail Risk; further, being ES more conservative than VaR and due to its subadditivity property, it can be seen that seasonal contracts are generally better off than monthly contracts in reducing global risk.

Keywords: climate change; temperature; risk hedging; Value-at-Risk; Expected Shortfall; portfolio diversification (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
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