Temperature-based weather derivatives modeling and contract design in mainland China

Zong, Lu Temperature-based weather derivatives modeling and contract design in mainland China. PhD thesis, University of Liverpool.

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Abstract

In the presented thesis, we build the theoretical framework for the development of temperature-based weather derivatives market in China. Our research is divided into two separate studies due to their di�erent scopes. In the �rst study, we focus on the determination of the most precise model for temperature-based weather derivative modeling and pricing in China. To achieve this objective, a heuristic comparison of the new stochastic seasonal variation (SSV) model with three established empirical temperature and pricing models, i.e. the Ala- ton model [1], the CAR model [2] and the Spline model [3] is conducted. Comparison criteria include residual normality, residual auto-correlation function (ACF), Akaike information criterion (AIC), relative errors, and stability of price behaviors. The re- sults show that the SSV model dominates the other three models by providing both a more precise �tting of the temperature process and more stable price behaviors. In the second study, novel forms of temperature indices are proposed and an- alyzed both on the city level and the climatic zone level, with the aim to provide a contract-selecting scheme that increases the risk management e�ciency in the agricultural sector of China. Performances of the newly-introduced indices are in- vestigated via an e�ciency test which considers the root mean square loss (RMSL), the value at risk (VaR) and the certainty-equivalent revenues (CERs). According to the results, agricultural risk management on the city scale can be optimized by using the absolute-deviation growth degree-day (GDD) index. On the other hand, it is suggested that climatic zone-based contracts can be more efficient compared with city-based contracts. The recommended contract-selection scheme is to purchase climatic zone-based average GDD contracts in climatic zone II, and to purchase climatic zone-based optimal-weighted GDD contracts in climatic zone I or III.

Item Type:	Thesis (PhD)
Additional Information:	Date: 2015-06 (completed)
Subjects:	?? QA ??
Depositing User:	Symplectic Admin
Date Deposited:	21 Jan 2016 16:22
Last Modified:	17 Dec 2022 01:27
DOI:	10.17638/02017319
URI:	https://livrepository.liverpool.ac.uk/id/eprint/2017319