An Empirical Study of the Prices Uncertainties of Some Weather Derivatives - Mines Saint-Étienne
Conference Papers Year : 2001

An Empirical Study of the Prices Uncertainties of Some Weather Derivatives

Abstract

Weather derivatives provide protection from losses caused by non-catastrophic climatic events. The underlying climatic risks are measured by means of indexes built from available meteorological data. Weather derivatives are then built on one of these indexes, which can therefore be considered as underlyings. In this paper, we consider temperature-based weather derivatives in an actuarial framework and quantify Futures contracts net premia uncertainties. The precision of the computed prices depends on the precision of the parameters estimators of the temperature process and on the importance of that process misspecifications. The aim of the present article is to quantify the effects of those two kinds of uncertainty - estimation errors and model errors - on these weather derivatives prices. Price uncertainty issues are current in other fields of finance. For instance, in option pricing framework, it is well known that one can quantify the uncertainties around the Black-Scholes option price resulting from the estimation error of volatility. Here, two kinds of errors are quantified independently. First, assuming that the model is well specified, the net premia can be computed analytically as a function of the parameters. Thus, approximate confident intervals for the net premia can be deduced from the asymptotic properties of the parameters maximum likelihood estimator. This is roughly the same methodology that was used to quantify the Black-Scholes option price estimators. Secondly, assuming that the estimated parameters are the "true" ones, we evaluate the effects of some model misspecifications using two corresponding bootstrap techniques.
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Dates and versions

emse-00744939 , version 1 (24-10-2012)

Identifiers

  • HAL Id : emse-00744939 , version 1

Cite

Olivier Roustant, Jean-Paul Laurent. An Empirical Study of the Prices Uncertainties of Some Weather Derivatives. Conférence EUROFIDAI-AFFI 2001, Dec 2001, Paris, France. ⟨emse-00744939⟩
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