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Sonderforschungsbereich 649: Ökonomisches Risiko, Humboldt-Universität Berlin >
SFB 649 Discussion Papers, HU Berlin >
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http://hdl.handle.net/10419/56665
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| Title: | | Localising temperature risk  |
| Authors: | | Härdle, Wolfgang Karl López Cabrera, Brenda Okhrin, Ostap Wang, Weining |
| Issue Date: | | 2010 |
| Series/Report no.: | | SFB 649 discussion paper 2011-001 |
| Abstract: | | On the temperature derivative market, modeling temperature volatility is an important issue for pricing and hedging. In order to apply pricing tools of financial mathematics, one needs to isolate a Gaussian risk factor. A conventional model for temperature dynamics is a stochastic model with seasonality and inter temporal autocorrelation. Empirical work based on seasonality and autocorrelation correction reveals that the obtained residuals are heteroscedastic with a periodic pattern. The object of this research is to estimate this heteroscedastic function so that after scale normalisation a pure standardised Gaussian variable appears. Earlier work investigated this temperature risk in dfferent locations and showed that neither parametric component functions nor a local linear smoother with constant smoothing parameter are flexible enough to generally describe the volatility process well. Therefore, we consider a local adaptive modeling approach to find at each time point, an optimal smoothing parameter to locally estimate the seasonality and volatility. Our approach provides a more flexible and accurate fitting procedure of localised temperature risk process by achieving excellent normal risk factors. |
| Subjects: | | weather derivatives localising temperature residuals seasonality local model selection |
| JEL: | | G19 G29 G22 N23 N53 Q59 |
| Document Type: | | Working Paper |
| Appears in Collections: | | SFB 649 Discussion Papers, HU Berlin
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