Modeling and financing weather risk: Three essays

This dissertation develops procedures for modeling weather risk and providing a more efficient financing mechanism. The objectives of the study organized in three essays are to (1) model the tail risk statistically through extreme value theory; (2) investigate the efficiency of weather markets in agricultural risk management; (3) envision an alternative system for financing the weather risk with a mix of public support and market-based solutions.; The first essay provides a statistical analysis for estimating the tail risk through extreme value theory (EVT) and comparing premium rates based on standard statistical methods and EVT. The results demonstrate the feasibility and effectiveness of extreme value model in modeling and assessing weather tail risk over the alternative parametric method.; The second essay develops a mean-variance model to investigate the efficiency of weather derivatives on agriculture and a simultaneous demand for potential weather derivatives and multiple peril crop insurance is analyzed theoretically and empirically. The emphasis is to analyze the impacts of the risk aversion level, transaction cost, and basis risk under a mean-variance framework.; The final essay envisions an alternative mechanism that blends public sector and market-based solutions in financing catastrophic risk through insurance and securitization. A general equilibrium model is developed to model the optimal decisions of different participants in this mechanism and a comparative static is performed.; In addition to important implications on crop insurance design and the development of a potential weather index, this study can be applied to finance catastrophic risk and other related issues.