Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56760
Authors: 
Härdle, Wolfgang Karl
López-Cabrera, Brenda
Ritter, Matthias
Year of Publication: 
2012
Series/Report no.: 
SFB 649 discussion paper 2012-027
Abstract: 
Forecasting based pricing of Weather Derivatives (WDs) is a new approach in valuation of contingent claims on nontradable underlyings. Standard techniques are based on historical weather data. Forward-looking information such as meteorological forecasts or the implied market price of risk (MPR) are often not incorporated. We adopt a risk neutral approach (for each location) that allows the incorporation of meteorological forecasts in the framework of WD pricing. We study weather Risk Premiums (RPs) implied from either the information MPR gain or the meteorological forecasts. The size of RPs is interesting for investors and issuers of weather contracts to take advantages of geographic diversification, hedging effects and price determinations. By conducting an empirical analysis to London and Rome WD data traded at the Chicago Mercantile Exchange (CME), we find out that either incorporating the MPR or the forecast outperforms the standard pricing techniques.
Subjects: 
weather derivatives
seasonal variation
temperature
risk premia
JEL: 
G19
G29
G22
N23
N53
Q59
Document Type: 
Working Paper

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