arXiv subjects

Philip Ngare

Publications and source records attributed to Philip Ngare.

5 recordsLinked to original sources

arXiv2019

Crop yield probability density forecasting via quantile random forest and Epanechnikov Kernel function

A reliable and accurate forecasting model for crop yields is of crucial importance for efficient decision-making process in the agricultural sector. However, due to weather extremes and uncertainties, most forecasting models for crop yield are not reliable and accurate. For measuring the uncertainty and obtaining further information of future crop yields, a probability density forecasting model based on quantile random forest and Epanechnikov kernel function (QRF-SJ) is proposed. The nonlinear structure of random forest is applied to change the quantile regression model for building the probabilistic forecasting model. Epanechnikov kernel function and solve-the equation plug-in approach of Sheather and Jones are used in the kernel density estimation. A case study using the annual crop yield of groundnut and millet in Ghana is presented to illustrate the efficiency and robustness of the proposed technique. The values of the prediction interval coverage probability and prediction interval normalized average width for the two crops show that the constructed prediction intervals capture the observed yields with high coverage probability. The probability density curves show that QRF-SJ method has a very high ability to forecast quality prediction intervals with a higher coverage probability. The feature importance gave a score of the importance of each weather variable in building the quantile regression forest model. The farmer and other stakeholders are able to realize the specific weather variable that affect the yield of a selected crop through feature importance. The proposed method and its application on crop yield dataset are the first of its kind in literature.

stat.AP↗

arXiv2019

Hedging crop yields against weather uncertainties -- a weather derivative perspective

The effects of weather on agriculture in recent years have become a major global concern. Hence, the need for an effective weather risk management tool (i.e., weather derivatives) that can hedge crop yields against weather uncertainties. However, most smallholder farmers and agricultural stakeholders are unwilling to pay for the price of weather derivatives (WD) because of the presence of basis risks (product-design and geographical) in the pricing models. To eliminate product-design basis risks, a machine learning ensemble technique was used to determine the relationship between maize yield and weather variables. The results revealed that the most significant weather variable that affected the yield of maize was average temperature. A mean-reverting model with a time-varying speed of mean reversion, seasonal mean, and local volatility that depended on the local average temperature was then proposed. The model was extended to a multi-dimensional model for different but correlated locations. Based on these average temperature models, pricing models for futures, options on futures, and basket futures for cumulative average temperature and growing degree-days are presented. Pricing futures on baskets reduces geographical basis risk, as buyers have the opportunity to select the most appropriate weather stations with their desired weight preference. With these pricing models, farmers and agricultural stakeholders can hedge their crops against the perils of extreme weather.

q-fin.MF↗

arXiv2018

Regime-Switching Temperature Dynamics Model for Weather Derivatives

Weather is a key production factor in agricultural crop production and at the same time the most significant and least controllable source of peril in agriculture. These effects of weather on agricultural crop production have triggered a widespread support for weather derivatives as a means of mitigating the risk associated with climate change on agriculture. However, these products are faced with basis risk as a result of poor design and modelling of the underlying weather variable (temperature). In order to circumvent these problems, a novel time-varying mean-reversion Lévy regime-switching model is used to model the dynamics of the deseasonalized temperature dynamics. Using plots and test statistics, it is observed that the residuals of the deseasonalized temperature data are not normally distributed. To model the non-normality in the residuals, we propose using the hyperbolic distribution to capture the semi-heavy tails and skewness in the empirical distributions of the residuals for the shifted regime. The proposed regime-switching model has a mean-reverting heteroskedastic process in the base regime and a Lévy process in the shifted regime. By using the Expectation-Maximization algorithm, the parameters of the proposed model are estimated. The proposed model is flexible as it modelled the deseasonalized temperature data accurately.

q-fin.MF↗

arXiv2018

Expansion formulas for European quanto options in a local volatility FX-LIBOR model

We develop an expansion approach for the pricing of European quanto options written on LIBOR rates (of a foreign currency). We derive the dynamics of the system of foreign LIBOR rates under the domestic forward measure and then consider the price of the quanto option. In order to take the skew/smile effect observed in fixed income and FX markets into account, we consider local volatility models for both the LIBOR and the FX rate. Because of the structure of the local volatility function, a closed form solution for quanto option prices does not exist. Using expansions around a proxy related to log-normal dynamics, we derive approximation formulas of Black--Scholes type for the price, that have the benefit of giving very rapid numerical procedures. Our expansion formulas have the major advantage that they allow for an accurate estimation of the error, using Malliavin calculus, which is directly related to the maturity of the option, the payoff, and the level and curvature of the local volatility function. These expansions also illustrate the impact of the quanto drift adjustment, while the numerical experiments show an excellent accuracy.

q-fin.PR↗

arXiv2014

Utility indifference pricing of derivatives written on industrial loss indexes

We consider the problem of pricing derivatives written on some industrial loss index via utility indifference pricing. The industrial loss index is modelled by a compound Poisson process and the insurer can adjust her portfolio by choosing the risk loading, which in turn determines the demand. We compute the price of a CAT(spread) option written on that index using utility indifference pricing.

q-fin.PR↗