 Modeling and Pricing Rain RiskOliver Musshoff, Martin Odening and Wei Xu No 25386, 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia from International Association of Agricultural Economists Abstract: In this paper we price a precipitation option based on empirical weather data from Germany using different pricing methods, among them Burn Analysis, Index Value Simulation and Daily Simulation. For that purpose we develop a daily precipitation model. Moreover, a decorrelation analysis is proposed to assess the spatial basis risk that is inherent to rainfall derivatives. The models are applied to precipitation data in Brandenburg, Germany. Based on simplifying assumptions of the production function, we quantify and compare the risk exposure of grain producers with and without rainfall insurance. It turns out that a considerable risk remains with producers who are remotely located from the weather station. Another finding is that significant differences may occur between the pricing methods. We identify the strengths and weaknesses of the pricing methods and give some recommendations for their applications. Our results are relevant for producers as well as for potential sellers of weather derivatives. Keywords: Resource/Energy Economics and Policy; Risk and Uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ags:iaae06:25386 Access Statistics for this paper More papers in 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia from International Association of Agricultural Economists Contact information at EDIRC. |
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