QuoteOriginally posted by: TraderJoeQuoteOriginally posted by: JamesH83thanks pcerutii,Just took a look at this paper, which I found very clear.http://www.energyforum.net/downloads/re ... _1.pdfThey
fit average daily temperatures around a sinosoidal trend and allow deviations through an Ornstein-Uhlenbeck process.Is this a fairly standard approach?How much more do you think the weather derivatives market will grow?And I quote : The US Department of Commerce estimates that nearly 10% of the US's $9 trillion GDP is exposed to weather risk. All over the world providers and end users are recognising this fact and are turning their attention to ways of protecting against or taking advantage of changes in the weather. The market is expected to expand rapidly and is one of the fastest areas of growth in the financial arena.That's an interesting quote. Just b/c there is exposure does not mean that there is a big market for a specific commodity to be traded. Many other traded commodities are sensitive to weather (power, gas). Consequently, it is not clear, you have to create a new market to replace the proxy hedges. That's the main reason that weather derivatives market has been, is and most likely will be a niche one.The funniest part about the quote is the last sentence: the market has been expected to expand rapidly since 1997. Has not happened for a good reason. Fastest area of growth? Patently false.