Description
This paper presents a general method for pricing weather derivatives. Specification tests find that a temperature series for Fresno, California follows a mean-reverting Brownian motion process with discrete jumps and ARCH errors. Based on this process, we define an equilibrium pricing model for cooling degree day weather options. Comparing option prices estimated with three methods: a traditional burn-rate approach, a Black-Scholes-Merton approximation, and an equilibrium Monte Carlo simulation reveals significant differences. Equilibrium prices are preferred on theoretical grounds, so are used to demonstrate the usefulness of weather derivatives as risk management tools for California specialty crop growers.
Details
Title
- Pricing Weather Derivatives
Contributors
- Richards, Timothy James (Author)
- Manfredo, Mark R. (Author)
- Sanders, Dwight R. (Author)
- Morrison School of Agribusiness and Resource Management (Publisher)
Date Created
The date the item was original created (prior to any relationship with the ASU Digital Repositories.)
2004-02-24
Resource Type
Collections this item is in
Identifier
- Identifier ValueASU 21.3:F 12/04-02
Note
- Faculty working paper series (Morrison School of Agribusiness and Resource Management) ; MSABR 04-02
- Includes bibliographical references (p. 27-32).