Exploring the financial risk of a temperature index: a fractional integrated approach
This paper introduces a new temperature index, which can suitably
represent the underlying of a weather derivative. Such an index is
defined as the weighted mean of daily average temperatures measured
in different locations. It may be used to hedge volumetric risk, that is
the effect of unexpected fluctuations in the demand/supply for some
specific commodities – of agricultural or energy type, for example –
due to unfavorable temperature conditions.
We aim at exploring the long term memory property of the volatility