A Lévy-driven rainfall model with applications to futures pricing
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Publication:1621995
Processes with independent increments; Lévy processes (60G51) Time series, auto-correlation, regression, etc. in statistics (GARCH) (62M10) Derivative securities (option pricing, hedging, etc.) (91G20) Applications of statistics to environmental and related topics (62P12) Diffusion processes (60J60)
Abstract: We propose a parsimonious stochastic model for characterising the distributional and temporal properties of rainfall. The model is based on an integrated Ornstein-Uhlenbeck process driven by the Hougaard L'evy process. We derive properties of this process and propose an extended model which generalises the Ornstein-Uhlenbeck process to the class of continuous-time ARMA (CARMA) processes. The model is illustrated by fitting it to empirical rainfall data on both daily and hourly time scales. It is shown that the model is sufficiently flexible to capture important features of the rainfall process across locations and time scales. Finally we study an application to the pricing of rainfall derivatives which introduces the market price of risk via the Esscher transform. We first give a result specifying the risk-neutral expectation of a general moving average process. Then we illustrate the pricing method by calculating futures prices based on empirical daily rainfall data, where the rainfall process is specified by our model.
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Cited in
(6)- Spectral-free estimation of Lévy densities in high-frequency regime
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- Nonparametric inference on Lévy measures of compound Poisson-driven Ornstein-Uhlenbeck processes under macroscopic discrete observations
- On modelling and pricing rainfall derivatives with seasonality
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- A censored Ornstein-Uhlenbeck process for rainfall modeling and derivatives pricing
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