A simple model for trading climate risk
Please always quote using this URN:urn:nbn:de:0296-matheon-3057
- Short term climate events such as the sea surface temperature anomaly known as El Nino are financial risk sources leading to incomplete markets. To make such risk tradable, we use a market model in which a climate index provides an extra investment opinion. Given one possible market price of risk each agent can maximize the exponential utility from three sources of income: capital market, additional security, and individual risk exposure. Under an equilibrium condition the market price of risk is uniquely determined by a backward stochastic differential equation. We translate these stochastic equations into semi-linear partial differential equations for the simulation of which numerical schemes are available. We choose two simple models for sea surface temperature, and with ENSO risk exposed fisher and farmer and a nonh-exposed bank three toy agents. By simulating their optimal investment into the climat index we obtain first insight into the dynamics of the market.
Author: | Peter Imkeller, Sebastien Chaumont, Matthias Müller, Ulrich Horst |
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URN: | urn:nbn:de:0296-matheon-3057 |
Referee: | Hans Föllmer |
Document Type: | Preprint, Research Center Matheon |
Language: | English |
Date of first Publication: | 2006/09/01 |
Release Date: | 2006/05/01 |
Institute: | Humboldt-Universität zu Berlin |
Preprint Number: | 303 |