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Model Comparison for Temperature-based Weather Derivatives in Mainland China

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  • Zong, Lu
  • Ender, Manuela

Abstract

In this paper, we provide a comprehensive comparison of two models for the simulation and pricing of temperature-based weather derivatives. The model of Alaton et al (2002) and the CAR model of Benth et al (2007) are applied to temperature data from twelve cities in Mainland China. The objective of this paper is to analyse whether the CAR model, as a more advanced model has a better performance in fitting the daily average temperature (DAT). A higher accuracy of the CAR model can be found indeed in terms of normality of residuals and in terms of smaller relative errors. However, the shortcomings of both models are revealed in this study as well. The Chinese cities involved cover all seven climatic zones in the standard of climatic regionalization that is used as a partition of China to get representative clusters.

Suggested Citation

  • Zong, Lu & Ender, Manuela, 2013. "Model Comparison for Temperature-based Weather Derivatives in Mainland China," Conference papers 332293, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332293
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    File URL: https://ageconsearch.umn.edu/record/332293/files/6233.pdf
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    References listed on IDEAS

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    1. Fred Espen Benth & Jurate Saltyte-Benth, 2005. "Stochastic Modelling of Temperature Variations with a View Towards Weather Derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(1), pages 53-85.
    2. Fred Espen Benth & Jūratė Šaltytė Benth, 2011. "Weather Derivatives and Stochastic Modelling of Temperature," International Journal of Stochastic Analysis, Hindawi, vol. 2011, pages 1-21, July.
    3. Dorje Brody & Joanna Syroka & Mihail Zervos, 2002. "Dynamical pricing of weather derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 2(3), pages 189-198.
    4. Fred ESPEN Benth & Jurate saltyte Benth, 2007. "The volatility of temperature and pricing of weather derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 7(5), pages 553-561.
    5. Fred Espen Benth & Jūratė Šaltytė Benth & Steen Koekebakker, 2008. "Stochastic Modeling of Electricity and Related Markets," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6811, September.
    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.
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