Managing Weather Risks: The Case of J. League Soccer Teams in Japan

• Published in: The Journal of risk and insurance Vol. 83; no. 4; pp. 877 - 912
• Main Authors: Ito, Haruyoshi, Ai, Jing, Ozawa, Akihiko
• Format: Journal Article
• Language: English
• Published: Malvern Blackwell Publishing Ltd 01.12.2016; Wiley Periodicals, Inc; American Risk and Insurance Association, Inc
• Subjects: Analysis; Business risks; Cash flow; Derivatives (Financial instruments); Financial performance; Financial risk; Hedging; Insurance risk; Precipitation; Professional soccer; Risk (Insurance); Risk aversion; Risk management; Seasons; Soccer; Teams; Weather; Japan
• ISSN: 0022-4367; 1539-6975
• DOI: 10.1111/jori.12071

Weather-related risks present significant concerns for businesses worldwide. This article studies the impact weather conditions have on the financial performance of sports teams and proposes a hedging mechanism to manage the exposure. We analyze a unique game attendance data set supplied by the Japanese premier soccer association, J. League. Our analysis shows that precipitation has a significantly adverse impact on game attendance and team profits. We then design a hedging mechanism for this risk exposure and examine its contribution to the corporate value of the teams. In particular, we use the Wang transform model to incorporate the decision makers' risk preferences in the evaluation of the weather derivatives, where the risk aversion parameters are obtained from a survey of J. League managers. We find that the proposed weather derivatives contribute significantly to team value. Our analysis and results provide insights for weather risk management for sports teams in the international markets.