Abstract
Floods and droughts represent an embedded monsoon factor impacting the Indian economy. Evaluating monsoon risk based on rainfall index metrics could help design appropriate alternative risk transfer products. This study proposes a new set of rainfall indices that can be used to explore the excess rainfall risk profile of the Indian Subcontinent. The study proposed a new set of indices for evaluating excess rainfall risk profiles which are defined as Excess Rainfall Days (ERDs). The methodology proceeds in a step-wise form: Empirical values of ERDs over 50 years for selected MSDs of India are derived, and then these index values are analyzed for determining the degree of variability and volatility, followed by the examination of the degree of inter-correlation amongst indices of selected Meteorological Sub-divisions. The research is based on the applications of econometric models such as the Augmented Dickey-Fuller (ADF) test followed by the GARCH model. The results revealed that several of the statistical properties of ERD indices support the idea that these indices could be used as building blocks for designing rainfall derivatives similar to HDDs/CDDs underlying temperature derivatives.
Highlights
India is exposed to a wide range of weather-related risks such as droughts, floods, storms, landslides, and extreme temperatures
The research is based on the applications of econometric models such as the Augmented Dickey-Fuller(ADF) test followed by the GARCH model
According to Central Water Commission (CWC) report on state-wise flood damage statistics show that West Bengal has the highest damage to crop due to floods and heavy rain followed by Andhra Pradesh, Karnataka, Uttrakhand, Uttar Pradesh, Kerala, Arunachal Pradesh, Gujarat region and Saurashtra region
Summary
India is exposed to a wide range of weather-related risks such as droughts, floods, storms, landslides, and extreme temperatures. Floods are the most economically damaging weather-related events, costing more than all other disaster events combined. From 1998 to 2017, 10 out of 14 extreme weather-related disasters were floods, causing economic damage of approximately US $45 billion and killing over 27000 people and affecting more than 370 million people (Singh et al, 2018) in India. Effective management of excess rainfall risk is essential for achieving sustainable development of the economy. A recent innovation in the financial markets involves the development of a rainfall-index based on derivative products as a risk management tool to hedge excess rainfall. Rainfall derivatives (RDs) represent new alternative risk transfer tools that could be used in the capital market to minimize the adverse impact of floods on the Indian economy. This study introduces a new set of rainfall indices that can be used as building blocks for designing rainfall derivatives contracts
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