Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables
Posted: 10 Oct 2003
The authors employ single-factor models to estimate daily temperature variations for the valuation of weather derivatives. Classical financial models are adapted to fit temperature seasonality to a time series. As an example, Monte Carlo simulations of heating and cooling degree-days are used as the underlying for weather derivatives that reference temperatures in regions of Spain. The article also discusses potential applications to hedging energy-related risks.
JEL Classification: G10, G12
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