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