AgEcon Search

AgEcon Search >
       Arizona State University >
          Morrison School of Agribusiness and Resource Management >
             Working papers >

Please use this identifier to cite or link to this item: http://purl.umn.edu/28536

Title: Pricing Weather Derivatives
Authors: Richards, Timothy J.
Manfredo, Mark R.
Sanders, Dwight R.
Keywords: derivative
jump-diffusion process
mean-reversion
volatility
weather
Issue Date: 2004
Series/Report no.: Working Paper MSABR 04-2
Abstract: This paper presents a general method for pricing weather derivatives. Specification tests find that a temperature series for Fresno, California follows a mean-reverting Brownian motion process with discrete jumps and ARCH errors. Based on this process, we define an equilibrium pricing model for cooling degree day weather options. Comparing option prices estimated with three methods: a traditional burn-rate approach, a Black-Scholes-Merton approximation, and an equilibrium Monte Carlo simulation reveals significant differences. Equilibrium prices are preferred on theoretical grounds, so are used to demonstrate the usefulness of weather derivatives as risk management tools for California specialty crop growers.
URI: http://purl.umn.edu/28536
Institution/Association: Arizona State University>Morrison School of Agribusiness and Resource Management>Working papers
Total Pages: 40
Language: English
Collections:Working papers

Files in This Item:

File SizeFormat
wp040002.pdf308KbPDFView/Open
Recommend this item

All items in AgEcon Search are protected by copyright.

 

 

Brought to you by the University of Minnesota Department of Applied Economics and the University of Minnesota Libraries with cooperation from the Agricultural and Applied Economics Association.

All papers are in Acrobat (.pdf) format. Get Adobe Reader

Contact Us

Powered by: