Regressing the temperature indexes on a linear trend suggested no significant warming or
cooling trends in our data.
10 We offer BA as a sufficient pricing method. While a change in the contract price
would uniformly shift the ex-post revenue of the buyer up or down, this would not affect
the payment schedule and the correlation between losses and payoffs embedded in the
contract structure (VB 2004).
11 Most exchange traded swap contracts, such as those traded on the CME, are settled
daily and are technically known as futures contracts. Most OTC swap contracts are
settled at the end of the contract and are known as forwards. This study uses derivatives
that are settled as forwards, and assumes that borrowing and lending exists at the risk-free
rate. It is unlikely that settlement method would change the qualitative results in a
significant way.
12 CME exchanged traded WDs do not exist for these specific locations, introducing
additional geographic basis risk to the results. Analysis of this basis risk may be a
promising area of future research.
13 The ES measure used here is based on the revenue distribution, and is thus a
modification of the measure reported in Dowd and Blake 2006, which is calculated in
terms of the loss distribution.
14 The ES measure has also been referred to as the Conditional Tail Expectation,
Expected Tail Loss, Tail VaR, Conditional VaR, Tail Conditional VaR, and Worst
Conditional Expectation. Alternatively, ES can be interpreted as the utility of tail-risk for
an agent with risk neutral tail-risk preferences.
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