Pricing weather derivatives

Timothy Richards, Mark Manfredo, Dwight R. Sanders

Research output: Contribution to journalArticlepeer-review

87 Scopus citations


This article presents a general method for pricing weather derivatives. Specification tests find that a temperature series for Fresno, CA follows a mean-reverting Brownian motion process with discrete jumps and autoregressive conditional heteroscedastic errors. Based on this process, we define an equilibrium pricing model for cooling degree day weather options. Comparing option prices estimated with three methods: a traditional burn-rate approach, a Black-Scholes-Merton approximation, and an equilibrium Monte Carlo simulation reveals significant differences. Equilibrium prices are preferred on theoretical grounds, so are used to demonstrate the usefulness of weather derivatives as risk management tools for California specialty crop growers.

Original languageEnglish (US)
Pages (from-to)1005-1017
Number of pages13
JournalAmerican Journal of Agricultural Economics
Issue number4
StatePublished - Nov 2004


  • Derivative
  • Jump-diffusion process
  • Mean reversion
  • Volatility
  • Weather

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics


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