Efficiency of weather derivatives for Chinese agriculture industry. Issue 1 (2nd February 2015)

• Record Type: Journal Article
• Authors: Ender, Manuela; Zhang, Ruyuan
• Is Part Of: China agricultural economic review. Volume 7:Issue 1(2015)
• Page Start: 102
• Page End: 121
• Publication Date: 2015-02-02
• Subjects: Agriculture -- Economic aspects -- China -- Periodicals; Rural development -- China -- Periodicals; Agriculture and state -- China -- Periodicals; 338.10951
• DOI: 10.1108/CAER-06-2013-0089
• Languages: English
• ISSNs: 1756-137X

Abstract

<abstract> <title> <x content-type="archive" xml:space="preserve">Abstract</x> </title> <sec> <title content-type="abstract-heading">Purpose</title> <p> – The purpose of this paper is to analyze the efficiency of temperature-based weather derivatives (WD) in reducing risk exposure for Chinese agriculture industry. Therefore, a put option with cumulated growing degree days as its underlying index is assumed to be bought by farmers as a risk management instrument to prevent income fluctuations from adverse temperature conditions. </p> </sec> <sec> <title content-type="abstract-heading">Design/methodology/approach</title> <p> – The objective of this paper is to analyze the efficiency of temperature-based WD in reducing risk exposure for Chinese agriculture industry. Therefore, a put option with cumulated growing degree days as its underlying index is assumed to be bought by farmers as a risk management instrument to prevent income fluctuations from adverse temperature conditions. </p> </sec> <sec> <title content-type="abstract-heading">Findings</title> <p> – The results of the efficiency tests show that temperature-based put options are efficient in offsetting yield shortfalls for rice and wheat in China. The weather-yield models have a high prediction power in explaining yield variation by temperature. </p> </sec> <sec> <title content-type="abstract-heading">Research limitations/implications</title> <p> – The de-trending procedure for the weather-yield model should be improved to distinguish better between technology progress, human activities and influence of weather. Further, more advanced models could be used for the pricing. </p> </sec> <sec> <title content-type="abstract-heading">Practical implications</title> <p> – The findings of the paper support the launch of WD as an efficient risk management tool for agriculture in China. Compared with traditional damage-based insurance, WD are more flexible, have lower transactions costs and avoid moral hazard or adverse selection. </p> </sec> <sec> <title content-type="abstract-heading">Originality/value</title> <p> – The efficiency problem of WD has not been analyzed sufficiently worldwide and especially not for developing countries like China where a large proportion of the population works as farmers. This paper supports to fill this gap.</p> </sec> </abstract>