A Closed-Form Solution for Cdd/Hdd Futures Under the Generalized Model : An Empirical Application
We derive the closed-form pricing formula for CDD/HDD futures under a proposed and generalized model with the empirical application. According to the proposed model, the conditional variance of the daily average temperature (DAT) is composed of three components: based level of the seasonal variance, the squared residual innovation, and the variance clustering. The empirical results show that these components account for the conditional variance of DAT seasonally and each component plays the most important role in explaining the conditional variance of DAT in different months. The asymmetric effect of variance is seasonal. The higher asymmetric effect of variance results in higher or lower variance and therefore leads to a higher or lower price of CDD/HDD futures. Besides, the covariance of DAT and the variance is positive and also seasonal. Finally, the temperature risk premium is positive and the proposed model can improve the forecasting performance of pricing the CDD/HDD futures
Year of publication: |
[2022]
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Authors: | Chuang, Ming-Che ; Shih, Pai-Ta ; Li, Shih-Wei ; Lin, Shih-Kuei |
Publisher: |
[S.l.] : SSRN |
Saved in:
freely available
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