Title: New weather indices for China: based on DCC-GARCH and GRU models
Authors: Qing Zhu; Jiarui Li; Renxian Zuo; Zheyu Guo
Addresses: International Business School, Shaanxi Normal University, Xi'an, 710000, China ' International Business School, Shaanxi Normal University, Xi'an, 710000, China ' Management and Economic School, Shaanxi Normal University, Xi'an, 710000, China ' Chang'an International Trust, Xi'an, 710000, China
Abstract: Because China is a major production and operations hub, it is at the centre of the world's supply chain. However, as weather can significantly affect supply chain operations, to better hedge risk, weather derivatives need to be introduced to Chinese financial markets to secure multinational supply chains. Using historical records over a decade, three models are proposed and new weather indices are created and improved using DCC-GARCH and GRU models. A simulation test from 2008 to 2017 data proved the indices to be feasible and stable, and matched 92% of the risk across two dimensions: 1) the changing Chinese weather data; 2) a connection with US weather index.
Keywords: C-CDDs; DCC-GARCH; GRU; weather derivatives.
International Journal of Services Technology and Management, 2021 Vol.27 No.3, pp.163 - 188
Received: 26 Oct 2018
Accepted: 17 Aug 2019
Published online: 21 May 2021 *