Utility-based approaches to pricing weather derivatives

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

Chapter 9 in Modeling and Pricing in Financial Markets for Weather Derivatives, 2012, pp 197-227 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn Chapter 5, we considered the problem of weather forwards and futures pricing by means of conditional expectation under some pricing measure Q chosen via the Girsanov transform. This way of pricing weather derivatives may be viewed as based on an actuarial approach, where the fair price is given by the expected payment from the derivative and adjusted by a risk loading modelled via the market price of risk θ in the Girsanov transform. In the considered context, we relied on the arbitrage theory, where any tradeable instrument should be a martingale in the risk-neutral world, otherwise arbitrage possibilities may exist. In a rather liquid market as futures on temperature, say, this seems to be a reasonable approach.This way of thinking may not be suitable in many situations relevant in weather derivatives pricing, and other approaches have been proposed in the literature. In fact, many weather derivatives contracts do not have any second-hand market, and thus in reality one enters a contract which is impossible to get out of. We present here utility-based pricing methods, taking this into account.Both the theory and analysis presented in this Chapter rest on stochastic control theory, and we assume some basic knowledge of this. We refer to [Øksendal (1998)] for an introduction to it.

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
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814401852_0009 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814401852_0009 (text/html)
Ebook Access is available upon purchase.

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:wsi:wschap:9789814401852_0009

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().