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Mathematics and Financial Economics

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16.05.2019

A regime switching model for temperature modeling and applications to weather derivatives pricing

verfasst von: Aysun Türkvatan, Azize Hayfavi, Tolga Omay

Erschienen in: Mathematics and Financial Economics | Ausgabe 1/2020

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Abstract

In this study, we propose a regime-switching model for temperature dynamics, where the parameters depend on a Markov chain. We improve upon the traditional models by modeling jumps in temperature dynamics via the chain itself. Moreover, we compare the performance of the proposed model with the existing models. The results indicate that the proposed model outperforms in the short time forecast horizon while the forecast performance of the proposed model is in line with the existing models for the long time horizon. It is shown that the proposed model is a relatively better representation of temperature dynamics compared to the existing models. Furthermore, we derive prices of weather derivatives written on several temperature indices.

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Titel: A regime switching model for temperature modeling and applications to weather derivatives pricing
verfasst von: Aysun Türkvatan
Azize Hayfavi
Tolga Omay
Publikationsdatum: 16.05.2019
Verlag: Springer Berlin Heidelberg
Erschienen in: Mathematics and Financial Economics / Ausgabe 1/2020
Print ISSN: 1862-9679
Elektronische ISSN: 1862-9660
DOI: https://doi.org/10.1007/s11579-019-00242-0

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