Ornstein-Uhlenbeck-based Weather Derivatives Pricing Model Research

Avoiding weather risk has become a worldwide focus with the growing influence of theweather changes in the economic life. The weather risk can be divided into twocategories:catastrophic weather risk and general weather risk. This research is the general weatherrisk, which is that these common weather changes in temperature, humidity, rainfall, snowfall,water flow cause changes in commodity production costs or market demand,resultingnon-catastrophic damage of economic cash flow and profit.weather risk,scharacteristics havenon-catastrophic,randomness, portability, systemic, quantity and so on.The weather riskparticipants in many industries, including the energy industry, energy consumers, the beverageindustry, the construction industry, the tourism industry, the transportation industry, primaryindustry, manufacturing, banking insurance industry.Weather derivatives is the special risks of a general weather risk management tools.Weatherderivatives and insurance compared: weather derivatives to circumvent the normal weather risk,that is, low risk, high probability of weather events;Weather derivatives revenue is based on theactual result of the changes in the weather, regardless of the results did not affect the holders ofweather derivatives contracts, weather derivatives contracts can only be purchased forspeculation;in the weather derivatives market participants can trade a weather derivative contractsto hedge the risk which in the insurance market is impossible.Weather derivatives and traditionalfinancial derivatives compared: risk transfer, corresponding to different subject matter; financialinstitutions,playing different role in market participants; different market subsidiaries in weatherderivatives market and financial derivatives market.The based subject of weather derivatives is the weather index, which is artificially preparedaccording to weather conditions, can not be listed for trading, and therefore weather derivativespricing is not appropriate for traditional actuarial pricing and a no-arbitrage pricing.This paper firstdescribes the nature of the weather risk, major market participants, listed weather risk index of theenergy and temperature values,values of the growth temperature, humidity index, precipitationindex and weather risk products such as call options, put options, hedging options, swaps,composite index structure products,then through a review of the actuarial pricing theory, arbitragepricing theory, for the characteristics of the weather derivatives weather derivatives pricingtheory.The empirical part,selects the average daily temperature data in Taiyuan from1960to2012,constructs the O-U model according to the data characteristics, estimats model parametersusing Eviews software and Matlab software,and selects the average daily temperature data inTaiyuan1-3months of2012to test the accuracy of the model simulation.In the finally,the weatherderivatives pricing theory and pricing models apply in temperature futures and temperaturesoptions,and pointed out that the weather derivatives in our future development prospects andconstraints.