Indifference pricing of weather derivatives

American Journal of Agricultural Economics

Volumn 90, Issue 4, 2008, Pages 979-993

  Xu, Wei ^a   Odening, Martin ^a   Musshoff, Oliver ^b  

^a HUMBOLDT UNIVERSITY   (Germany)

^b UNIVERSITY OF GÖTTINGEN   (Germany)

Author keywords

Incomplete markets; Indifference pricing; Weather insurance

Indexed keywords

CROP PRODUCTION; INSURANCE SYSTEM; PRICE DYNAMICS; WEATHER; WILLINGNESS TO PAY;

EID: 51349093511     PISSN: 00029092     EISSN: 14678276     Source Type: Journal    
DOI: 10.1111/j.1467-8276.2008.01154.x     Document Type: Article

References (36)

1. Alaton, P., B. Djehiche, and D. Stillberger. 2002. "On Modeling and Pricing Weather Derivatives." Applied Mathematical Finance 9:1-20.
2. Becherer, D. 2003. "Rational Hedging and Valuation of Integrated Risks Under Constant Absolute Risk Aversion." Insurance: Mathematics & Economics 33:1-28.
3. Benth, F.E. 2004. Option Theory with Stochastic Analysis: An Introduction to Mathematical Finance. Berlin: Springer-Verlag.
4. Brockett, P.L., M. Wang, C. Yang, and H. Zou. 2006. "Portfolio Effects and Valuation of Weather Derivatives." The Financial Review 41:55-76.
5. Cao, M., and J. Wei. 2004. "Weather Derivatives Valuation and Market Price of Weather Risk." Journal of Futures Markets 24:1065-89.
6. Davis, M. 1997. "Option Pricing in Incomplete Markets." In: M.A.H. Dempster and S.R. Pliska, eds. Mathematics of Derivative Securities. Cambridge: Cambridge University Press, pp. 227-54.
7. Davis, M. 2001. "Pricing Weather Derivatives by Marginal Value." Quantitative Finance 1:305-8.
8. Dischel, B. 2002. "Dry Market in Need of Liquidity." Risk Magazine: Risk Management for Investor, September, pp. 20-22.
9. Dixit, A.K., and R.S. Pindyck. 1994. Investment Under Uncertainty. Princeton, NJ: Princeton University Press.
10. Duffie, D. 2001. Dynamic Asset Pricing Theory, 3rd ed. Princeton, NJ: Princeton University Press.
11. Eberlein, E., and J. Jacod. 1997. "On the Range of Options Prices." Finance and Stochastics 1:131-40.
12. Edwards, M.J., and P. Simmons. 2004. "Preliminary Results for the Measurement of Willingness to Pay for Climate Derivatives." Paper presented at the 48th Annual Conference of the Australian Agricultural and Resource Economics Society, Melbourne, 11-13 February.
13. Fleege, T.A., T.J. Richards, M.R. Manfredo, and D.R. Sanders. 2004. "The Performance of Weather Derivatives in Managing Risks of Specialty Crops." Paper presented at the NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, St. Louis, Missouri, 19-20 April.
14. Föllmer, H., and A. Schied. 2002. Stochastic Finance: An Introduction in Discrete Time. Berlin: Walter de Gruyter.
15. Frittelli, M. 2000. "The Minimal Entropy Martingale Measure and the Valuation Problem in Incomplete Markets." Mathematical Finance 10:39-52.
16. Germany, Federal Ministry of Food, Agricultural and Consumer Protection. 2006. Ernte 2006: Mengen und Preise. Berlin: German Government. Available at http://www.bmelv.de/.
17. Henderson, V., and D. Hobson. 2008. "Utility Indifference Pricing." In R. Carmona, ed. Volume on Indifference Pricing. Princeton, NJ: PrincetIn University Press: in press.
18. Hull, J.C. 2006. Options, Futures & Other Derivatives, 6th. ed. Upper Saddle River, NJ: Prentice Hall International.
19. Jensen, B.A., and J.A. Nielsen. 1996. "Pricing by No Arbitrage." In D.R. Cox, D.V. Hinkley, and O.E. Barndorff-Nielsen, eds. Time Series Models in Economics, Finance and Other Fields. London: Chapman & Hall, pp. 177-225.
20. Jewson, S., and A. Brix. 2005. Weather Derivative Valuation: The Meteorological, Statistical, Financial and Mathematical Foundations. Cambridge: Cambridge University Press.
21. Karl, T.R., and K.E. Trenberth. 2003. "Modern Global Climate Change." Science 302:1719-23.
22. Lucas, R.E. 1978. "Asset Prices in an Exchange Economy." Econometrica 46: 1429-45.
23. Monoyios, M. 2004. "Performance of Utility-Based Strategies for Hedging Basis Risk." Quantitative Finance 4:245-55.
24. Monoyios, M. 2007. "The Minimal Entropy Measure and an Esscher Transform in an Incomplete Market Model." Statistics & Probability Letters 77(11):1070-6.
25. Musiela, M., and Zariphopoulou, T. 2004. "An Example of Indifference Prices Under Exponential Preferences." Financial and Stochastics 8:229-39.
26. Myers, R.J., Y. Liu, and S. Hanson. 2005. "How Should We Value Agricultural Insurance Contracts." Paper prepared at the American Agricultural Economics Association Annual Meeting, Providence, Rhode Island, 24-27 July.
27. Neftci, S.N. 1996. An Introduction to the Mathematics of Financial Derivatives. San Diego, CA: Academic Press.
28. Odening, M., O. Musshoff, and W. Xu. 2007. "Analysis of Rainfall Derivatives Using Daily Precipitation Models: Opportunities and Pitfalls." Agricultural Finance Review 67:135-56.
29. Pratt, J.W. 1964. "Risk Aversion in the Small and in the Large." Econometrica 32:122-36.
30. Richards, T.J., M.R. Manfredo, and D.R. Sanders. 2004. "Pricing Weather Derivatives." American Journal of Agricultural Economics 86:1005-17.
31. Saha, A. 1993. "Expo-Power Utility: A 'Flexible'Form for Absolute and Relative Risk Aversion." American Journal of Agricultural Economics 75:905-13.
32. Skees, J. 2001. "The Potential Role of Weather Markets for U.S. Agriculture." The Climate Report 2. Available at http://www.guaranteedweather.com/.
33. Turvey, C.G. 2005. "The Pricing of Degree-Day Weather Options." Agricultural Finance Review Spring 2005:59-85.
34. Varangis, P., J. Skees, and B. Barnett. 2002. "Weather Indexes for Developing Countries." In R. Dischel, ed. Climate Risk and the Weather Market. London: Risk Books.
35. Vedenov, D.V., and B.J. Barnett. 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments." Journal of Agricultural and Resource Economics 29:387-403.
36. Woodard, J.D., and P. Garcia. 2007. "Basis Risk and Weather Hedging Effectiveness." Paper presented at the 101st EAAE Seminar 'Management of Climate Risks in Agriculture', Berlin, 05-06 July.