A fair pricing approach to weather derivatives

Platen, E; West, J

A fair pricing approach to weather derivatives

Platen, E

West, J

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Publication Type:: Journal Article
Citation:: Asia-Pacific Financial Markets, 2004, 11 (1), pp. 23 - 53
Issue Date:: 2004-03-01

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Field	Value	Language
dc.contributor.author	Platen, E https://orcid.org/0000-0003-4595-3123	en_US
dc.contributor.author	West, J	en_US
dc.date.issued	2004-03-01	en_US
dc.identifier.citation	Asia-Pacific Financial Markets, 2004, 11 (1), pp. 23 - 53	en_US
dc.identifier.issn	1387-2834	en_US
dc.identifier.uri	http://hdl.handle.net/10453/5261
dc.description.abstract	This paper proposes a consistent approach to the pricing of weather derivatives. Since weather derivatives are traded in an incomplete market setting, standard hedging based pricing methods cannot be applied. The growth optimal portfolio, which is interpreted as a world stock index, is used as a benchmark or numeraire such that all benchmarked derivative price processes are martingales. No measure transformation is needed for the proposed fair pricing. For weather derivative payoffs that are independent of the value of the growth optimal portfolio, it is shown that the classical actuarial pricing methodology is a particular case of the fair pricing concept. A discrete time model is constructed to approximate historical weather characteristics. The fair prices of some particular weather derivatives are derived using historical and Gaussian residuals. The question of weather risk as diversifiable risk is also discussed. © Springer 2005.	en_US
dc.relation	http://purl.org/au-research/grants/arc/DP0343913
dc.relation.ispartof	Asia-Pacific Financial Markets	en_US
dc.relation.isbasedon	10.1007/s10690-005-4252-9	en_US
dc.subject.classification	Finance	en_US
dc.title	A fair pricing approach to weather derivatives	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.citation.volume	11	en_US
utslib.for	150201 Finance	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Science
pubs.organisational-group	/University of Technology Sydney/Faculty of Science/School of Mathematical and Physical Sciences
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.issue	1	en_US
pubs.publication-status	Published	en_US
pubs.volume	11	en_US

Abstract:

This paper proposes a consistent approach to the pricing of weather derivatives. Since weather derivatives are traded in an incomplete market setting, standard hedging based pricing methods cannot be applied. The growth optimal portfolio, which is interpreted as a world stock index, is used as a benchmark or numeraire such that all benchmarked derivative price processes are martingales. No measure transformation is needed for the proposed fair pricing. For weather derivative payoffs that are independent of the value of the growth optimal portfolio, it is shown that the classical actuarial pricing methodology is a particular case of the fair pricing concept. A discrete time model is constructed to approximate historical weather characteristics. The fair prices of some particular weather derivatives are derived using historical and Gaussian residuals. The question of weather risk as diversifiable risk is also discussed. © Springer 2005.

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http://hdl.handle.net/10453/5261