Local sensitivity analysis of heating degree day and cooling degree day temperature derivatives prices

Abstract

We study the local sensitivity of heating degree day (HDD) and cooling degree day (CDD) temperature futures and option prices with respect to perturbations in the deseasonalized temperature or in one of its derivatives up to a certain order determined by the continuous-time autoregressive process modelling the deseasonalized temperature in the HDD and CDD indexes. We also consider an empirical case where a CAR process of autoregressive order 3 is fitted to New York temperatures and we perform a study of the local sensitivity of these financial contracts and a posterior analysis of the results.