Pricing Temperature Derivatives under a Time-Changed Levy Model

Pablo Olivares

Papers from arXiv.org

Abstract: The objective of the paper is to price weather contracts using temperature as the underlying process when the later follows a mean-reverting dynamics driven by a time-changed Brownian motion coupled to a Gamma Levy subordinator and time-dependent deterministic volatility. This type of model captures the complexity of the temperature dynamic providing a more accurate valuation of their associate weather contracts. An approximated price is obtained by a Fourier expansion of its characteristic function combined with a selection of the equivalent martingale measure following the Esscher transform proposed in Gerber and Shiu (1994).

Date: 2020-05
New Economics Papers: this item is included in nep-env
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