Closed-Form Expressions for the Pricing of Weather Derivatives: The Expected Payoff for t-Distributed Indices

8 Pages Posted: 9 Aug 2008

Date Written: August 8, 2008

Abstract

We derive closed-form expressions for the expected payoff of weather derivatives contracts for a t distributed weather index. There are three common situations in which t distributions might serve as a reasonable model for weather indices: first, some weather variables may be t distributed; second the t distribution can be used as a fatter-tailed alternative to the normal distribution as a stress test or model alternative;and third, objective Bayesian predictions of normally distributed data are t distributed.

Keywords: weather derivatives, bayesian, t distribution

JEL Classification: G12

Suggested Citation

Jewson, Stephen, Closed-Form Expressions for the Pricing of Weather Derivatives: The Expected Payoff for t-Distributed Indices (August 8, 2008). Available at SSRN: https://ssrn.com/abstract=1212528 or http://dx.doi.org/10.2139/ssrn.1212528

Stephen Jewson (Contact Author)

Risk Management Solutions ( email )

London EC3R 8NB
United Kingdom

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