WEATHER DERIVATIVES: MANAGING RISK WITH MARKET-BASED INSTRUMENTS

Timothy Richards, Mark Manfredo and Dwight R. Sanders

No 19074, 2002 Conference, April 22-23, 2002, St. Louis, Missouri from NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: Accurate pricing of weather derivatives is critically dependent upon correct specification of the underlying weather process. We test among six likely alternative processes using maximum likelihood methods and data from the Fresno, CA weather station. Using these data, we find that the best process is a mean-reverting geometric Brownian process with discrete jumps and ARCH errors. We describe a pricing model for weather derivatives based on such a process.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 17
Date: 2002
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:ncrtwo:19074

DOI: 10.22004/ag.econ.19074

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