THE PRICING OF DEGREE-DAY WEATHER OPTIONS

Calum Turvey

No 34109, Working Papers from University of Guelph, Department of Food, Agricultural and Resource Economics

Abstract: This paper presents a model and framework for pricing degree-day weather derivatives when the weather variable is a non-traded asset. Using daily weather data from 1840-1996 it is shown that a degree-day weather index exhibits stable volatility and satisfies the random walk hypothesis. The paper compares the options prices from the recommended model and compares it to a typical insurance-type model. The results show that the insurance model overprices the option value at-the-money and this may explain why the bid-ask spreads in the weather derivatives market is sometimes very large.

Keywords: Marketing; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 46
Date: 2001
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: The pricing of degree‐day weather options (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uguewp:34109

DOI: 10.22004/ag.econ.34109

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