Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables

doi:10.1108/eb022969

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Journal of Risk Finance, The

ISSN: 1526-5943
Incorporates: Balance Sheet

Online from: 1999

Subject Area: Accounting and Finance

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Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables

Document Information:
Title:	Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables
Author(s):	HIPÒLIT TORRÓ, (Member of the Department of Financial Economics at the University of Valencia, Spain. hipolit.torro@uv.es), VICENTE MENEU, (Member of the Department of Financial Economics at the University of Valencia.), ENRIC VALOR, (Member of the Department of Thermodynamics at the University of Valencia.)
Citation:	HIPÒLIT TORRÓ, VICENTE MENEU, ENRIC VALOR, (2003) "Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables", Journal of Risk Finance, The, Vol. 4 Iss: 4, pp.6 - 17
Article type:	General review
DOI:	10.1108/eb022969 (Permanent URL)
Publisher:	MCB UP Ltd
Abstract:	The authors employ single-factor models to estimate daily temperature variations for the valuation of weather derivatives. Classical financial models are adapted to fit temperature seasonality to a time series. As an example, Monte Carlo simulations of heating and cooling degree-days are used as the underlying for weather derivatives that reference temperatures in regions of Spain. The article also discusses potential applications to hedging energy-related risks.

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