Precipitation Modeling and Contract Valuation: A Frontier in Weather Derivatives

Posted: 22 Sep 2007

See all articles by Anlong Li

Anlong Li

KL Capital

Melanie Cao

York University - Schulich School of Business

Jason Zhanshun Wei

University of Toronto - Rotman School of Management

Abstract

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

Suggested Citation

Li, Anlong and Cao, Melanie and Wei, Jason Zhanshun, Precipitation Modeling and Contract Valuation: A Frontier in Weather Derivatives. Journal of Alternative Investments, Vol. 7, No. 2, 2004, Available at SSRN: https://ssrn.com/abstract=1016137

Anlong Li (Contact Author)

KL Capital ( email )

141 Jackson Blvd
Suite 1650
Chcago, IL 60604
United States

Melanie Cao

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 33801 (Phone)

Jason Zhanshun Wei

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3698 (Phone)
416-971-3048 (Fax)

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