Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables

26 Pages Posted: 21 Mar 2001

See all articles by Hipòlit Torró

Hipòlit Torró

University of Valencia

Vicente Meneu

University of Valencia - Department of Financial Economics

Enric Valor

University of Valencia - Department of Financial Economics

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Abstract

This paper estimates single factor stochastic models describing daily air temperature behaviour. We modify classical financial models to reflect temperature seasonality and fit them to a time series representing temperatures in Spain. The estimated models are used in Monte Carlo simulations to obtain heating and cooling degree-days, which are used as an underlying reference in weather derivatives. The final goal of this work is to obtain an insight into weather derivative valuation, and so making it easier to manage economic activity risks closely related to temperature (i.e. oil, gas and electricity prices and volumes).

Keywords: Cooling Degree-days, Energy, Heating Degree-days, Seasonality, Stochastic Models, Weather Derivatives.

JEL Classification: G10, G12

Suggested Citation

Torró, Hipòlit and Meneu Ferrer, Vicente and Valor i Micó, Enric, Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables. EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=264178 or http://dx.doi.org/10.2139/ssrn.264178

Hipòlit Torró (Contact Author)

University of Valencia ( email )

Facultat d'Economia
Av. dels Tarongers s/n
Valencia, 46022
Spain
34-6-162 50 74 (Phone)
34-6-382 83 70 (Fax)

HOME PAGE: http://www.uv.es/torro

Vicente Meneu Ferrer

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

Enric Valor i Micó

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

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