Facoltà di scienze economiche

The weather derivatives market : modelling and pricing temperature

Bellini, Francesca ; Barone-Adesi, Giovanni (Dir.)

Thèse de doctorat : Università della Svizzera italiana, 2005 ; 2005ECO001.

The main objective of the thesis is to find a pricing model for weather derivatives based on temperature. A general Ornstein-Uhlenbeck process with seasonal mean and volatility is proposed to model the time-dynamics of daily average temperatures. The model is fitted to almost 54 years of daily observations recorded in Chicago, Philadelphia, Portland and Tucson. The unequivocal evidence of fat... More

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    Summary
    The main objective of the thesis is to find a pricing model for weather derivatives based on temperature. A general Ornstein-Uhlenbeck process with seasonal mean and volatility is proposed to model the time-dynamics of daily average temperatures. The model is fitted to almost 54 years of daily observations recorded in Chicago, Philadelphia, Portland and Tucson. The unequivocal evidence of fat tails and negative skewness observed for the city of Tucson is modelled by introducing Lèvy processes. Since weather derivatives is an incomplete market, unique prices are derived using the market price of risk. Finally, an estimate of the market price of risk is provided by calibrating theoretical prices to the actual quoted market prices.