IDEAS home Printed from https://ideas.repec.org/a/pal/risman/v21y2019i4d10.1057_s41283-019-00052-0.html
   My bibliography  Save this article

Modeling and pricing of space weather derivatives

Author

Listed:
  • Birgit Lemmerer

    (University of Graz)

  • Stephan Unger

    (Saint Anselm College)

Abstract

This article proposes a pricing model for space weather derivatives with payout depending on solar activity. By measuring the disturbance of the Earth’s magnetosphere, it is possible to price space weather derivatives which trigger a payoff if a certain level of energization is reached. Since energetic particles emitted by the Sun are a non-tradeable quantity, unique prices of contracts in an incomplete market are obtained using inverse transformation sampling as well as the market price of risk. We find a step-wise decline of option prices with increasing barriers of Kp-index values, a dependence of the option prices on the sunspot cycle, as well as reduced sensitivity of longer-dated maturities for higher Kp-index values.

Suggested Citation

  • Birgit Lemmerer & Stephan Unger, 2019. "Modeling and pricing of space weather derivatives," Risk Management, Palgrave Macmillan, vol. 21(4), pages 265-291, December.
    • Handle: RePEc:pal:risman:v:21:y:2019:i:4:d:10.1057_s41283-019-00052-0
    DOI: 10.1057/s41283-019-00052-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41283-019-00052-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41283-019-00052-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dorje Brody & Joanna Syroka & Mihail Zervos, 2002. "Dynamical pricing of weather derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 2(3), pages 189-198.
    2. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management.
    3. Jewson,Stephen & Brix,Anders With contributions by-Name:Ziehmann,Christine, 2005. "Weather Derivative Valuation," Cambridge Books, Cambridge University Press, number 9780521843713, November.
    4. M. Davis, 2001. "Pricing weather derivatives by marginal value," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 305-308, March.
    5. Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1005-1017.
    6. Peter Alaton & Boualem Djehiche & David Stillberger, 2002. "On modelling and pricing weather derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 1-20.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephan Unger, 2019. "The Impact of Space Weather on Human Health," Biomedical Journal of Scientific & Technical Research, Biomedical Research Network+, LLC, vol. 22(1), pages 16442-16443, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:hum:wpaper:sfb649dp2009-046 is not listed on IDEAS
    2. Benth, Fred & Härdle, Wolfgang Karl & López Cabrera, Brenda, 2009. "Pricing of Asian temperature risk," SFB 649 Discussion Papers 2009-046, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Rui Zhou & Johnny Siu-Hang Li & Jeffrey Pai, 2019. "Pricing temperature derivatives with a filtered historical simulation approach," The European Journal of Finance, Taylor & Francis Journals, vol. 25(15), pages 1462-1484, October.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    5. Markus Stowasser, 2011. "Modelling rain risk: a multi-order Markov chain model approach," Journal of Risk Finance, Emerald Group Publishing, vol. 13(1), pages 45-60, December.
    6. Wolfgang Karl Härdle & Brenda López Cabrera, 2012. "The Implied Market Price of Weather Risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(1), pages 59-95, February.
    7. Heng Xiong & Rogemar Mamon, 2018. "Putting a price tag on temperature," Computational Management Science, Springer, vol. 15(2), pages 259-296, June.
    8. A. Alexandridis & A. Zapranis, 2013. "Wind Derivatives: Modeling and Pricing," Computational Economics, Springer;Society for Computational Economics, vol. 41(3), pages 299-326, March.
    9. Ahmet Göncü, 2013. "Comparison of temperature models using heating and cooling degree days futures," Journal of Risk Finance, Emerald Group Publishing, vol. 14(2), pages 159-178, February.
    10. Musshoff, Oliver & Hirschauer, Norbert, 2008. "Hedging von Mengenrisiken in der Landwirtschaft – Wie teuer dürfen „ineffektive“ Wetterderivate sein?," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 57(05), pages 1-12.
    11. Turvey, Calum G. & Norton, Michael, 2008. "An Internet-Based Tool for Weather Risk Management," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(1), pages 63-78, April.
    12. Jr‐Wei Huang & Sharon S. Yang & Chuang‐Chang Chang, 2018. "Modeling temperature behaviors: Application to weather derivative valuation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(9), pages 1152-1175, September.
    13. L. Kermiche & N. Vuillermet, 2016. "Weather derivatives structuring and pricing: a sustainable agricultural approach in Africa," Applied Economics, Taylor & Francis Journals, vol. 48(2), pages 165-177, January.
    14. Dorfleitner, Gregor & Wimmer, Maximilian, 2010. "The pricing of temperature futures at the Chicago Mercantile Exchange," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1360-1370, June.
    15. Ahčan, Aleš, 2012. "Statistical analysis of model risk concerning temperature residuals and its impact on pricing weather derivatives," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 131-138.
    16. Evarest Emmanuel & Berntsson Fredrik & Singull Martin & Yang Xiangfeng, 2018. "Weather derivatives pricing using regime switching model," Monte Carlo Methods and Applications, De Gruyter, vol. 24(1), pages 13-27, March.
    17. Andrea Barth & Fred Espen Benth & Jurgen Potthoff, 2011. "Hedging of Spatial Temperature Risk with Market-Traded Futures," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(2), pages 93-117.
    18. Cui, Hairong & Zhou, Ying & Dzandu, Michael D. & Tang, Yinshan & Lu, Xunfa, 2019. "Is temperature-index derivative suitable for China?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    19. Prabakaran, Sellamuthu & Garcia, Isabel C. & Mora, Jose U., 2020. "A temperature stochastic model for option pricing and its impacts on the electricity market," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 58-77.
    20. Andrea Martínez Salgueiro & Maria-Antonia Tarrazon-Rodon, 2021. "Weather derivatives to mitigate meteorological risks in tourism management: An empirical application to celebrations of Comunidad Valenciana (Spain)," Tourism Economics, , vol. 27(4), pages 591-613, June.
    21. repec:hum:wpaper:sfb649dp2014-006 is not listed on IDEAS
    22. Groll, Andreas & López-Cabrera, Brenda & Meyer-Brandis, Thilo, 2016. "A consistent two-factor model for pricing temperature derivatives," Energy Economics, Elsevier, vol. 55(C), pages 112-126.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:risman:v:21:y:2019:i:4:d:10.1057_s41283-019-00052-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.