Schiller, Frank and Seidler, Gerold and Wimmer, Maximilian (2012) Temperature Models for Pricing Weather Derivatives. Quantitative Finance 12 (3), pp. 489-500.
We present four models for predicting temperatures that can be used for pricing weather derivatives. Three of the models have been suggested in previous literature, and we propose another model which uses splines to remove trend and seasonality effects from temperature time series in a flexible way. Using historical temperature data from 35 weather stations across the United States, we test the performance of the models by evaluating virtual heating degree days (HDD) and cooling degree days (CDD) contracts. We find that all models perform better when predicting HDD indices than predicting CDD indices. However, all models based on a daily simulation approach significantly underestimate the variance of the errors.
|Date:||27 February 2012|
|Institutions:||Business, Economics and Information Systems > Institut für Betriebswirtschaftslehre > Lehrstuhl für Finanzierung (Prof. Dr. Gregor Dorfleitner)|
|Research groups and research centres:||Immobilien- und Kapitalmärkte|
|Keywords:||Weather Derivatives, Stochastic Processes, Temperature Dynamics, Heating Degree Days, Cooling Degree Days, Daily Simulation|
|Subjects:||300 Social sciences > 330 Economics|
|Refereed:||Yes, this version has been refereed|
|Created at the University of Regensburg:||Yes|
|Owner:||Dr. Maximilian Wimmer|
|Deposited On:||07 Dec 2009 12:39|
|Last Modified:||18 May 2012 10:49|