International Journal of Stochastic Analysis
Volume 2011 (2011), Article ID 576791, 21 pages
http://dx.doi.org/10.1155/2011/576791
Research Article
Weather Derivatives and Stochastic Modelling of Temperature
1Center of Mathematics for Applications, University of Oslo, P.O. Box 1053 Blindern, 0316 Oslo, Norway
2School of Management, University of Agder, Serviceboks 422, 4604 Kristiansand, Norway
3HØKH, Research Centre, Akershus University Hospital, Lørenskog, Norway
4Faculty Division Akershus University Hospital, University of Oslo, Oslo, Norway
Received 31 January 2011; Revised 4 May 2011; Accepted 17 May 2011
Academic Editor: Maria J. Lopez-Herrero
Copyright © 2011 Fred Espen Benth and Jūratė Šaltytė Benth. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract
We propose a
continuous-time autoregressive model for the
temperature dynamics with volatility being the
product of a seasonal function and a stochastic
process. We use the Barndorff-Nielsen and
Shephard model for the stochastic volatility.
The proposed temperature dynamics is flexible
enough to model temperature data accurately, and
at the same time being analytically tractable.
Futures prices for commonly traded
contracts at the Chicago Mercantile Exchange on indices like
cooling- and heating-degree days and cumulative average
temperatures are computed, as well as option prices on
them.