Precipitation Modeling and Contract Valuation: A Frontier in Weather Derivatives
Posted: 22 Sep 2007
In this paper, we discuss the application of precipitation contracts by describing several structured precipitation derivatives transactions. We propose, calibrate, and compare three precipitation models: A Gamma distribution, a mixture of exponentials, and kernel density. Based on the data for Chicago Midway Airport (1950-2003), we find that the latter two models dominate the first model inters of fit. The paper fills the gap in the literature and the industry.
Keywords: Weather Derivatives, Weather Risk Management, Precipitation Modeling
JEL Classification: G13
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