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

Summary: Quadratic hedging of weather and catastrophe risk
by using short term climate predictions
Stefan Ankirchner and Peter Imkeller
Institut f¨ur Mathematik
Humboldt-Universit¨at zu Berlin
Unter den Linden 6
10099 Berlin
Germany
February 12, 2008
Abstract
The extent to which catastrophic weather events occur strongly
depends on global climate conditions such as average sea surface tem-
peratures (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. Then
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

  

Source: Ankirchner, Stefan - Institut für Angewandte Mathematik, Universität Bonn
Imkeller, Peter - Institut für Mathematik, Humboldt Universität zu Berlin

 

Collections: Mathematics