Calibration of Temperature Futures by Changing the Mean Reversion

16 Pages Posted: 21 Mar 2015

See all articles by Fred Espen Benth

Fred Espen Benth

University of Oslo - Department of Mathematics

Salvador Ortiz-Latorre

University of Oslo - Department of Mathematics

Date Written: March 20, 2015

Abstract

In this work we conduct a study on the calibration of futures contracts on temperature indices. We consider a continuous-time autoregressive dynamics for the deseasonalized temperatures and a pricing measure allowing for a simultaneous change of the level and speed of mean reversion in the risk neutral dynamics. We compare this pricing measure with the one provided by the classical Girsanov's transform. Our study shows that the new pricing measure provides better calibration errors and more realistic risk premium profiles.

Keywords: calibration, temperature futures, pricing measure, mean reversion

JEL Classification: G13

Suggested Citation

Benth, Fred Espen and Ortiz-Latorre, Salvador, Calibration of Temperature Futures by Changing the Mean Reversion (March 20, 2015). Available at SSRN: https://ssrn.com/abstract=2581566 or http://dx.doi.org/10.2139/ssrn.2581566

Fred Espen Benth

University of Oslo - Department of Mathematics

Blindern, N-0162, Os
Norway

Salvador Ortiz-Latorre (Contact Author)

University of Oslo - Department of Mathematics ( email )

Blindern, N-0162, Os
Norway

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