Memory Time-Varying Models for Weather Derivative Pricing

Caporin, Massimiliano; Pres, Juliusz

doi:10.2139/ssrn.1322682

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Memory Time-Varying Models for Weather Derivative Pricing

61 Pages Posted: 5 Jan 2009 Last revised: 16 Dec 2009

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Juliusz Pres

Szczecin University of Technology

Date Written: January 3, 2009

Abstract

We present a generalisation of the double long memory ARFIMA-FIGARCH model introducing time-varying memory coefficients for both mean and variance. The model satisfies the empirical evidence of changing memory observed in average temperature series and can provide useful improvements in the forecasting, simulation and pricing issues related to weather derivatives. We provide an application related to the forecast and simulation of temperature indices used for pricing of weather options.

Keywords: weather derivatives, long memory, time-varying long memory, derivative pricing, model simulation and forecast

JEL Classification: C22, C15, C53, G10, G13

Suggested Citation: Suggested Citation

Caporin, Massimiliano and Pres, Juliusz, Memory Time-Varying Models for Weather Derivative Pricing (January 3, 2009). Available at SSRN: https://ssrn.com/abstract=1322682 or http://dx.doi.org/10.2139/ssrn.1322682