Simple Models for the Volatility of Weather Derivative Underlyings
20 Pages Posted: 23 Feb 2004
Date Written: December 8, 2003
We discuss how a surrogate underlying process for weather derivatives can be defined using the expected settlement index. We then present four deterministic models for the volatility of this process: a simple top-hat model, a trapezium model that includes the ramping effects of forecasts, and seasonally varying versions of both of these models.
Keywords: weather, weather derivatives, weather volatility
JEL Classification: G13
Suggested Citation: Suggested Citation