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Volume 16
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10.3390/ijerph16244882
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Article

An Actuarial Pricing Method for Air Quality Index Options

by
Zhuoxin Liu
1,
Laijun Zhao
2,3,*,
Chenchen Wang
1,
Yong Yang
4,
Jian Xue
1,*,
Xin Bo
5,
Deqiang Li
1 and
Dengguo Liu
6,7
1
School of Economics and Management, Shaanxi University of Science and Technology, Xi’an 710021, China
2
China Institute for Urban Governance, Shanghai Jiao Tong University, Shanghai 200030, China
3
Sino-US Global Logistics Institute, Shanghai Jiao Tong University, Shanghai 200030, China
4
School of Arts and Sciences, Shanxi University of Science & Technology, Xi’an 710021, China
5
Appraisal Center for Environment and Engineering, Ministry of Environmental Protection, Beijing 100012, China
6
School of Automotive Studies, Tongji University, Shanghai 201804, China
7
Shanghai Environment Monitoring Center, Shanghai 200235, China
*
Authors to whom correspondence should be addressed.
Int. J. Environ. Res. Public Health 2019, 16(24), 4882; https://doi.org/10.3390/ijerph16244882
Submission received: 31 October 2019 / Revised: 27 November 2019 / Accepted: 28 November 2019 / Published: 4 December 2019
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Abstract

Poor air quality has a negative impact on social life and economic production activities. Using financial derivatives to hedge risks is one of the important methods. Air quality index (AQI) options are designed to help enterprises cope with the operational risk caused by air pollution. First, the expanded Ornstein–Uhlenbeck model is established using an autoregressive-generalized autoregressive conditional heteroscedasticity (AR-GARCH) method to predict AQI for a city. Next, the average AQI is constructed to be as the underlying index for the AQI options. We then priced AQI options using an actuarial method with an Esscher transform. Meanwhile payoff functions for the options are established to let enterprises hedge against the operational risk caused by air pollution. Finally, we determined the price of AQI options using data from Xi’an, China, and the example of a tourism enterprise as a case study of how AQI options can be applied to hedge against operational risk for enterprises. With AQI options trading, enterprises can hedge against operational risks caused by air pollution. The applicability of AQI options is wide, it can also be applied in other cities or regions.
Keywords: air quality index; options; Ornstein–Uhlenbeck model; actuarial pricing; risk hedging air quality index; options; Ornstein–Uhlenbeck model; actuarial pricing; risk hedging

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MDPI and ACS Style

Liu, Z.; Zhao, L.; Wang, C.; Yang, Y.; Xue, J.; Bo, X.; Li, D.; Liu, D. An Actuarial Pricing Method for Air Quality Index Options. Int. J. Environ. Res. Public Health 2019, 16, 4882. https://doi.org/10.3390/ijerph16244882

AMA Style

Liu Z, Zhao L, Wang C, Yang Y, Xue J, Bo X, Li D, Liu D. An Actuarial Pricing Method for Air Quality Index Options. International Journal of Environmental Research and Public Health. 2019; 16(24):4882. https://doi.org/10.3390/ijerph16244882

Chicago/Turabian Style

Liu, Zhuoxin, Laijun Zhao, Chenchen Wang, Yong Yang, Jian Xue, Xin Bo, Deqiang Li, and Dengguo Liu. 2019. "An Actuarial Pricing Method for Air Quality Index Options" International Journal of Environmental Research and Public Health 16, no. 24: 4882. https://doi.org/10.3390/ijerph16244882

APA Style

Liu, Z., Zhao, L., Wang, C., Yang, Y., Xue, J., Bo, X., Li, D., & Liu, D. (2019). An Actuarial Pricing Method for Air Quality Index Options. International Journal of Environmental Research and Public Health, 16(24), 4882. https://doi.org/10.3390/ijerph16244882

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