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