6533b86dfe1ef96bd12c9531

RESEARCH PRODUCT

Weather Derivatives and Stochastic Modelling of Temperature

Jūratė ŠAltytė BenthFred Espen BenthFred Espen Benth

subject

Statistics and ProbabilityArticle SubjectStochastic volatilityStochastic modellingStochastic processlcsh:MathematicsApplied Mathematicslcsh:QA1-939Autoregressive modelModeling and SimulationEconometricsVolatility (finance)Futures contractAnalysisMathematics

description

We propose a continuous-time autoregressive model for the temperature dynamics with volatility being the product of a seasonal function and a stochastic process. We use the Barndorff-Nielsen and Shephard model for the stochastic volatility. The proposed temperature dynamics is flexible enough to model temperature data accurately, and at the same time being analytically tractable. Futures prices for commonly traded contracts at the Chicago Mercantile Exchange on indices like cooling- and heating-degree days and cumulative average temperatures are computed, as well as option prices on them.

yearjournalcountryeditionlanguage
2011-07-14International Journal of Stochastic Analysis
https://doi.org/10.1155/2011/576791