Extensions of temperature and wind speed models

Fred Espen Benth and Jūratė Šaltytė Benth
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Fred Espen Benth: University of Oslo, Norway
Jūratė Šaltytė Benth: University of Oslo, Norway

Chapter 6 in Modeling and Pricing in Financial Markets for Weather Derivatives, 2012, pp 139-155 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn the previous two Chapters we analyzed stochastic models for the temperature and wind speed dynamics based on CARMA processes. The purpose of this Chapter is to extend these models in various directions, to allow for even more sophisticated dynamics for these weather factors. In particular, we introduce stochastic volatility in weather modelling, and generalize the CARMA dynamics to so-called Lévy semistationary processes. The popular class of fractional Brownian motion based models is discussed. For all the models we look at the pricing of weather derivatives as an application.In the analyses of this Chapter we make use of Lévy processes. The reader not familiar with this class of stochastic processes, can find a basic, yet thorough introduction in [Cont and Tankov (2004)].

Keywords: Weather Derivatives; Stochastic Processes; HDD; CDD; Autoregressive Moving Average Time Series; Futures Contracts; Options; Utility Pricing; Girsanov Transform; Esscher Transform; Precipitation; Temperature; Wind Speed (search for similar items in EconPapers)
Date: 2012
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