Weather Derivatives, Spatial Aggregation, and Systemic Risk: Implications for Reinsurance Hedging

Previous studies identify limited potential efficacy of weather derivatives in hedging agricultural exposures. In contrast to earlier studies which investigate the problem at low levels of aggregation, we find that better weather hedging opportunities may exist at higher levels of spatial aggregation. Aggregating production exposures reduces idiosyncratic risk, leaving a greater proportion of the total risk in the form of systemic weather risk which can be effectively hedged using relatively simple weather derivatives. The aggregation effect suggests that the potential for weather derivatives in agriculture may be greater than previously thought, particularly for aggregators of risk such as reinsurers.


Issue Date:
2008-04
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/36705
Published in:
Journal of Agricultural and Resource Economics, Volume 33, Number 1
Page range:
34-51
Total Pages:
18




 Record created 2017-04-01, last modified 2017-08-25

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