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https://doi.org/10.2478/crebss-2020-0003

Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation

Berislav Žmuk   ORCID icon orcid.org/0000-0003-3487-1376 ; University of Zagreb, Faculty of Economics and Business, Department of Statistics, Zagreb, Croatia
Matej Kovač ; Addiko bank, Croatia

Puni tekst: engleski, pdf (326 KB) str. 27-42 preuzimanja: 69* citiraj
APA 6th Edition
Žmuk, B. i Kovač, M. (2020). Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation. Croatian Review of Economic, Business and Social Statistics, 6 (1), 27-42. https://doi.org/10.2478/crebss-2020-0003
MLA 8th Edition
Žmuk, Berislav i Matej Kovač. "Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation." Croatian Review of Economic, Business and Social Statistics, vol. 6, br. 1, 2020, str. 27-42. https://doi.org/10.2478/crebss-2020-0003. Citirano 24.11.2020.
Chicago 17th Edition
Žmuk, Berislav i Matej Kovač. "Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation." Croatian Review of Economic, Business and Social Statistics 6, br. 1 (2020): 27-42. https://doi.org/10.2478/crebss-2020-0003
Harvard
Žmuk, B., i Kovač, M. (2020). 'Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation', Croatian Review of Economic, Business and Social Statistics, 6(1), str. 27-42. https://doi.org/10.2478/crebss-2020-0003
Vancouver
Žmuk B, Kovač M. Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation. Croatian Review of Economic, Business and Social Statistics [Internet]. 2020 [pristupljeno 24.11.2020.];6(1):27-42. https://doi.org/10.2478/crebss-2020-0003
IEEE
B. Žmuk i M. Kovač, "Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation", Croatian Review of Economic, Business and Social Statistics, vol.6, br. 1, str. 27-42, 2020. [Online]. https://doi.org/10.2478/crebss-2020-0003

Sažetak
An accurate weather forecast is the basis for the valuation of weather derivatives, securities that partially compensate for financial losses to holders in case of, from their perspective, adverse outside temperature. The paper analyses precision of two forecast models of average daily temperature, the Ornstein-Uhlenbeck process (O-U process) and the generalized autoregressive conditional heteroskedastic model (GARCH model) and presumes for the GARCH model to be the more accurate one. Temperature data for the period 2000-2017 were taken from the DHMZ database for the Maksimir station and used as the basis for the 2018 forecast. Forecasted values were compared to the available actual data for 2018 using MAPE and RMSE methods. The GARCH model provides more accurate forecasts than the O-U process by both methods. RMSE stands at 3.75 °C versus 4.53 °C for the O-U process and MAPE is 140.66 % versus 144.55 %. Artificial intelligence and supercomputers can be used for possible improvements in forecasting accuracy to allow for additional data to be included in the forecasting process, such as up-to-date temperatures and more complex calculations.

Ključne riječi
GARCH model; MAPE; Ornstein-Uhlenbeck process; RMSE; temperature forecasting; weather derivatives

Hrčak ID: 238226

URI
https://hrcak.srce.hr/238226

Posjeta: 152 *