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Quadratic hedging of weather and catastrophe risk by using short term climate predictions

Please always quote using this URN:urn:nbn:de:0296-matheon-4697
  • The extent to which catastrophic weather events occur strongly depends on global climate conditions such as average sea surface temperatures (SST) or sea level pressures. Some of the factors can be predicted up to a year in advance, and should therefore be taken into account in any reasonable management of weather related risk. In this paper we first set up a risk model that integrates climate factors. The we show how variance minimizing hedging strategies explicitly depend on the factors' prediction. Our analysis is based on a detailed study of the predictable representation property on the combined Poisson and Wiener spaces. Using tools of the stochastic calculus of variations we derive a representation formula of the Clark-Ocone type. Finally, we exemplify the theory developed in a case study of US hurricane risk. We derive hedging strategies taking into account that US hurricane activity strongly depends on the SST of the Pacific Ocean.

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Metadaten
Author:Stefan Ankirchner, Peter Imkeller
URN:urn:nbn:de:0296-matheon-4697
Referee:Anton Bovier
Document Type:Preprint, Research Center Matheon
Language:English
Date of first Publication:2008/03/03
Release Date:2008/02/28
Institute:Humboldt-Universität zu Berlin
Preprint Number:461
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