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arXiv · 2005.14350

Pricing Temperature Derivatives under a Time-Changed Levy Model

Pablo Olivares
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Abstract

The objective of the paper is to price weather contracts using temperature as the underlying process when the later follows a mean-reverting dynamics driven by a time-changed Brownian motion coupled to a Gamma Levy subordinator and time-dependent deterministic volatility. This type of model captures the complexity of the temperature dynamic providing a more accurate valuation of their associate weather contracts. An approximated price is obtained by a Fourier expansion of its characteristic function combined with a selection of the equivalent martingale measure following the Esscher transform proposed in Gerber and Shiu (1994).

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Pablo Olivares. 2020-05-29. Pricing Temperature Derivatives under a Time-Changed Levy Model. https://arxiv.org/abs/2005.14350

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