Title

A stochastic harmonic oscillator temperature model for the valuation of weather derivatives

Publication Name

Mathematics

Abstract

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.

Open Access Status

This publication may be available as open access

Volume

9

Issue

22

Article Number

2890

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Link to publisher version (DOI)

http://dx.doi.org/10.3390/math9222890