Pricing weather derivatives and managing weather risks under regime switching
Peng Li et al.
What the paper says
Accepted by: Aris Syntetos A large number of empirical studies have shown that regime switching is an important characteristic of temperature processes. Thus, this work develops an efficient finite difference scheme with one-sided difference to price weather derivatives with the partial differential equations (PDEs) of regime-switching temperature models. For management purposes, an initial management model framework is then proposed to manage portfolios incorporating weather derivatives. This work also performs statistical analysis on the temperature dataset from Toronto, Canada and recalibrates the regime-switching temperature models, as one parameter value is found incorrect in the literature. Numerical experiments indicate that the finite difference scheme is much more competitive than the Monte Carlo simulations and the lattice approaches. The PDEs pricing approach has great potential to be used in practical portfolio management problems involving weather risks.
3 citations
Evidence weight
Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40
| F · citation impact | 0.32 × 0.4 = 0.13 |
| M · momentum | 0.57 × 0.15 = 0.09 |
| V · venue signal | 0.50 × 0.05 = 0.03 |
| R · text relevance † | 0.50 × 0.4 = 0.20 |
† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.