Portfolio effects and valuation of weather derivatives

Patrick L. BROCKETT, Mulong WANG, Chuanhou YANG, Hong ZOU

Research output: Journal PublicationsJournal Article (refereed)

19 Citations (Scopus)

Abstract

In a mean-variance framework, the indifference pricing approach is adopted to value weather derivatives, taking account of portfolio effects. Our analysis shows how the magnitude of portfolio effects is related to the correlation between weather indexes and other risky assets, the correlation between weather indexes, and the payoff structures of the existing weather derivatives in an investor’s asset portfolio. We also conduct some preliminary empirical analysis. This study contributes to the weather derivative pricing literature by incorporating both the hedgeable and unhedgeable parts of weather risks in illustrating the portfolio effects on the indifference prices of weather derivatives.
Original languageEnglish
Pages (from-to)55-76
Number of pages22
JournalFinancial Review
Volume41
Issue number1
DOIs
Publication statusPublished - 1 Feb 2006

Keywords

  • G12
  • G13
  • Incomplete market pricing models
  • Indifference prices
  • Portfolio effects
  • Weather derivatives
  • Weather risk contract valuation
  • Weather risk securitization

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