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On the Systemic Nature of Weather Risk

Author

Listed:
  • Xu, Wei
  • Filler, Gunther
  • Odening, Martin
  • Okhrin, Ostap

Abstract

Systemic weather risk is a major obstacle for the formation of private (nonsubsidized) crop insurance. This paper explores the possibility of spatial diversification of insurance by estimating the joint occurrence of unfavorable weather conditions in different locations. For that purpose copula methods are employed that allow an adequate description of stochastic dependencies between multivariate random variables. The estimation procedure is applied to weather data in Germany. Our results indicate that indemnity payments based on temperature as well as on cumulative rainfall show strong stochastic dependence even at a national scale. Thus the possibility to reduce risk exposure by increasing the trading area of the insurance is limited. Irrespective of their economic implications our results pinpoint the necessity of a proper statistical modeling of the dependence structure of multivariate random variables. The usual approach of measuring stochastic dependence with linear correlation coefficients turned out to be questionable in the context of weather insurance as it may overestimate diversification effects considerably.

Suggested Citation

  • Xu, Wei & Filler, Gunther & Odening, Martin & Okhrin, Ostap, 2009. "On the Systemic Nature of Weather Risk," 2009 Conference, August 16-22, 2009, Beijing, China 51426, International Association of Agricultural Economists.
    • Handle: RePEc:ags:iaae09:51426
    DOI: 10.22004/ag.econ.51426
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    1. Vedenov, Dmitry V., 2008. "Application of Copulas to Estimation of Joint Crop Yield Distributions," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6264, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    5. Zhu, Ying & Ghosh, Sujit K. & Goodwin, Barry K., 2008. "Modeling Dependence in the Design of Whole Farm---A Copula-Based Model Approach," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6282, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    9. H. Holly Wang & Hao Zhang, 2003. "On the Possibility of a Private Crop Insurance Market: A Spatial Statistics Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 111-124, March.
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    More about this item

    Keywords

    Agribusiness; Agricultural Finance; Crop Production/Industries; Risk and Uncertainty;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • Q19 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Other

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