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eISSN: 2083-5906
ISSN: 1230-1485
ISSN: 1230-1485
ORIGINAL RESEARCH
Design and Valuation of Rainfall Derivatives
within the Yangtze River Economic Belt in China
1
Institute for Chengdu-Chongqing Economic Zone Development, Chongqing Technology and Business University,
Chongqing 400067, China
Submission date: 2025-07-01
Final revision date: 2025-07-23
Acceptance date: 2025-08-23
Online publication date: 2025-10-02
Corresponding author
Yi Li
Institute for Chengdu-Chongqing Economic Zone Development, Chongqing Technology and Business University, Chongqing 400067, China
Institute for Chengdu-Chongqing Economic Zone Development, Chongqing Technology and Business University, Chongqing 400067, China
KEYWORDS
TOPICS
ABSTRACT
In the Yangtze River Economic Belt, extreme rainfall events have a substantial impact on economic
activities in agriculture, energy consumption, and associated industries. Consequently, precise rainfall
forecasting is of paramount importance for these sectors. This study utilizes rainfall data from
11 provinces (municipalities) within the Yangtze River Economic Belt spanning from 2004 to 2023
to construct both the Seasonal Autoregressive Integrated Moving Average (SARIMA) model
and the Ornstein-Uhlenbeck (O-U) model for the rainfall index. Based on the models’ fitting
performance, a more appropriate rainfall index prediction model is selected. Furthermore, by integrating
option pricing theory, this paper designs an option contract contingent on rainfall. Through the analysis
of rainfall prediction in the Yangtze River Economic Belt and its derivative pricing, we have identified
several key findings. Firstly, after differential processing, the rainfall data from this region exhibits
stability, making it suitable for time series model analysis. Secondly, by fitting the rainfall data using
both the SARIMA and O-U models, we found that the predicted values closely align with actual
observations, indicating that these models provide accurate fits. Thirdly, employing the SARIMA and
O-U models simulation to predict rainfall, we observed that the SARIMA model yields superior fit
accuracy when comparing their respective errors. Fourthly, option contracts designed based on the
SARIMA model reveal that increased climate volatility and higher climate risk correlate with higher
pricing. Additionally, this study explores the practical application potential of weather derivatives in
the Yangtze River Economic Belt and how they can be utilized to mitigate climate risks associated
with rainfall fluctuations. The overarching goal is to effectively reduce climate risks faced by industries
within the Yangtze River Economic Belt through scientifically sound rainfall predictions and derivative
pricing, thereby promoting regional economic stability.
CONFLICT OF INTEREST
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
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CITATIONS (1):
1.
Temperature forecasting and derivatives pricing in the Yangtze River economic belt of China
Juan Gao, Yi Li
Geomatics, Natural Hazards and Risk
Juan Gao, Yi Li
Geomatics, Natural Hazards and Risk
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| eISSN: | 2083-5906 |
| ISSN: | 1230-1485 |
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