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