A Stochastic Harmonic Oscillator Temperature Model for the Valuation of Weather Derivatives
Stochastic processes are employed in this paper to capture the evolution of daily mean temperatures, with the goal of pricing temperature-based weather options. A stochastic harmonic oscillator model is proposed for the temperature dynamics and results of numerical simulations and parameter estimati...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2021-11-01
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| Series: | Mathematics |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-7390/9/22/2890 |
| Summary: | Stochastic processes are employed in this paper to capture the evolution of daily mean temperatures, with the goal of pricing temperature-based weather options. A stochastic harmonic oscillator model is proposed for the temperature dynamics and results of numerical simulations and parameter estimation are presented. The temperature model is used to price a one-month call option and a sensitivity analysis is undertaken to examine how call option prices are affected when the model parameters are varied. |
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| ISSN: | 2227-7390 |