Pricing Weather Derivatives
Mark R. Manfredo and
Dwight R. Sanders
No 28536, Working Papers from Arizona State University, Morrison School of Agribusiness and Resource Management
This paper presents a general method for pricing weather derivatives. Specification tests find that a temperature series for Fresno, California follows a mean-reverting Brownian motion process with discrete jumps and ARCH errors. Based on this process, we define an equilibrium pricing model for cooling degree day weather options. Comparing option prices estimated with three methods: a traditional burn-rate approach, a Black-Scholes-Merton approximation, and an equilibrium Monte Carlo simulation reveals significant differences. Equilibrium prices are preferred on theoretical grounds, so are used to demonstrate the usefulness of weather derivatives as risk management tools for California specialty crop growers.
Keywords: derivative; jump-diffusion process; mean-reversion; volatility; weather; Demand and Price Analysis (search for similar items in EconPapers)
References: Add references at CitEc
Citations View citations in EconPapers (39) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ags:asumwp:28536
Access Statistics for this paper
More papers in Working Papers from Arizona State University, Morrison School of Agribusiness and Resource Management Contact information at EDIRC.
Series data maintained by AgEcon Search ().