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

Posted: 10 Oct 2003

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

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

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. Journal of Risk Finance, Vol. 4, No. 4, pp. 6-17, Summer 2003. Available at SSRN: https://ssrn.com/abstract=446860

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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