Basis risk and weather hedging effectiveness

Joshua D. Woodard, Philip Garcia

Research output: Contribution to journalArticlepeer-review


Basis risk – the risk that payoffs of a hedging instrument do not correspond to the underlying exposures – is cited as a primary concern for implementing weather data, we investigate several dimensions of weather basis risk in the U.S. corn market. Results suggest that while geographic basis risk can be significant, it should not preclude the use of geographic cross‐hedging, particularly with temperature as opposed to precipitation derivatives. Risk reduction is appreciable and the degree to which geographic basis risk impedes effective hedging diminishes as spatial aggregation in the risk exposure and hedging instrument increases.

Original languageEnglish (US)
Pages (from-to)99-117
Number of pages19
JournalAgricultural Finance Review
Issue number1
StatePublished - May 5 2008


  • Basis risk
  • Hedging effectiveness
  • Spatial aggregation
  • Weather derivatives

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics, Econometrics and Finance (miscellaneous)


Dive into the research topics of 'Basis risk and weather hedging effectiveness'. Together they form a unique fingerprint.

Cite this