Weather Derivatives and Crop Insurance in China

The effectiveness of financial weather derivatives to hedge against risk in agriculture has not been well demonstrated; therefore, this risk hedging instrument has only been slowly adopted. The current study analyzes the hedging efficiency of weather index derivatives for corn production in Northeas...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Sun, Baojing, Guo, Changhao, van Kooten, G Cornelis
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2013
Subjects
Crop insurance
Efficiency
Hedging
Rain
China
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Summary:The effectiveness of financial weather derivatives to hedge against risk in agriculture has not been well demonstrated; therefore, this risk hedging instrument has only been slowly adopted. The current study analyzes the hedging efficiency of weather index derivatives for corn production in Northeast China. It has two purposes: (1) to identify potential weather variables, such as cumulative rainfall or growing degree days, that impact corn yields; and (2) to analyze the efficiency of financial weather derivatives under varying strike values, where efficiency is defined in terms of its benefit to farmers. Regression results indicate that cumulative rainfall is important for crop production in the study region, and that, under some circumstances, it is efficient to use a weather-indexed financial derivatives to hedge the corresponding risk.