Weather Derivatives Pricing Model Comparison In China

With global warming,in recent years,the world has been affected by different meteorological disasters.Changes in the weather will not only have a negligible impact on people's lives,but also cause incalculable economic losses to a large number of economies.For instance,about 30%of the US economy is influenced by the weather,and China is more serious.Compared with the United States,China relies more on agricultural development.In addition,the weather is precisely a key factor in determining agricultural output.Therefore,financial products that can effectively hedge weather risks are urgently needed to be developed in China.The birth of weather derivatives can really help industries that are affected by the weather to effectively avoid or hedge the weather risks,thus ensuring stable returns.Its importance is self-evident.Although in the global market,the weather derivatives market is still at the starting,it is bound to become more popular in the future.This is because a large number of industries cannot eliminate the profit and loss impact of weather risks,and weather-related insurance products are difficult to develop.Therefore,in the context of China's lack of weather derivatives markets,it is of great significance to study weather pricing pricing models suitable for Chinese urban temperatures.This paper compares two classical temperature models based on the temperature data of five cities in China for pricing weather derivatives.We also design a HDD call option for five cities.We found the Alaton model and the Benth model both can capture most seasonal information of Chinese temperature data,but the results simulated by Monte Carlo simulation still remain nonnegligible errors,because of the non-normality of the residuals.The reference level changes cannot eliminate this deviation,but affect the relative errors.Finally,this paper looks forward to the future development of China's weather derivatives market,and proposes relevant policies and recommendations in conjunction with the Chinese market.This article is divided into eight parts:The first section introduces the research background and the significance of the topic,as well as the main contributions.The second section summarizes the research history and results of domestic and foreign experts on the pricing model of weather derivatives.The third section describes the definition,classification and advantages of the weather derivatives compared to the insurance industry.The fourth section mathematically expresses two classic models and compares the model differences in theory.The fifth section exercises regression analysis of the weather derivatives pricing model based on the Chinese urban temperature data,and compares the differences in parameter estimates.In the sixth section,according to the temperature model,under the no-arbitrage assumption,the analytical expression of the temperature option is obtained.The seventh section designs a weather option and uses the Monte Carlo simulation method to price derivatives.The eighth section summarizes the conclusions and implications of this paper.