A stochastic volatility model for the valuation of temperature derivatives - École des Ponts ParisTech Access content directly
Preprints, Working Papers, ... Year : 2022

A stochastic volatility model for the valuation of temperature derivatives

Abstract

This paper develops a new stochastic volatility model for the temperature that is a natural extension of the Ornstein-Uhlenbeck model proposed by Benth and Benth (2007). This model allows to be more conservative regarding extreme events while keeping tractability. We give a method based on Conditional Least Squares to estimate the parameters on daily data and estimate our model on eight major European cities. We then show how to calculate efficiently the average payoff of weather derivatives both by Monte-Carlo and Fourier transform techniques. This new model allows to better assess the risk related to temperature volatility.

Dates and versions

hal-03777685 , version 1 (15-09-2022)

Identifiers

Cite

Aurélien Alfonsi, Nerea Vadillo. A stochastic volatility model for the valuation of temperature derivatives. 2022. ⟨hal-03777685⟩
29 View
0 Download

Altmetric

Share

Gmail Facebook X LinkedIn More