Analysis of Temperature Derivatives (Ch 10) - Pt 2

The Chapter 10 is devoted to the market for temperature futures. We present continuous-time mean reversion models being generalizations of autoregressive moving average time series. Applying these to temperature data, we find that the 'volatility' of temperature has a clear seasonal pattern. The temperature models allow for rather explicit pricing of the typical futures traded on CME. The chapter includes a thorough empirical analysis of Stockholm temperature data in view of the proposed models.

(Sec. 10.1-10.2 will be presented by K. Malenfant and Sec. 10.3-10.4-by A.Swishchuk).