Experimental Study Of The Pricing Of China’s Weather Derivatives Based On Temperature

In recent years, global warming has caused climate and weather changes frequent and irregular, which causes non-disaster weather risks increase sharply. Non-disaster weather risks mean that the non-catastrophic weather events of temperature, humidity, rainfall, snowfall, sunshine and others lead to the uncertainty of company’s future earnings and cash flow. Non-disaster weather risks have a significant impact on China’s economy and industries, new financial instruments weather derivatives can effectively manage non-disaster weather risks.This paper summarizes the current non-disaster weather risk situation China is facing and analyzes its impact on China’s national economy. Then makes a presentation on the underlying index and financial style of weather derivatives. And elaborates several controversial pricing methods of weather derivatives. This paper uses the time-series model to analyze the daily average temperature data from January1,2001to December31,2010of Nanjing, which can obtain the daily temperature change model of Nanjing. Moreover the prices for temperature-based index derivatives are calculated on the base of the extending Lucas(1978) model of equilibrium pricing model. Finally, the paper provides relevant recommendations of applying the weather derivatives for China.