Title

Portfolio effects and valuation of weather derivatives

Document Type

Journal article

Source Publication

Financial Review

Publication Date

2-1-2006

Volume

41

Issue

1

First Page

55

Last Page

76

Keywords

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

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.

DOI

10.1111/j.1540-6288.2006.00133.x

Print ISSN

07328516

Publisher Statement

Copyright © 2006 Blackwell Publishing Ltd. Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Language

English

Recommended Citation

Brockett, P. L., Wang, M., Yang, C., & Zou, H. (2006). Portfolio effects and valuation of weather derivatives. Financial Review, 41(1), 55-76. doi: 10.1111/j.1540-6288.2006.00133.x

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