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

• Author: Akihiko Ozawa,Jing Ai,Haruyoshi Ito
• Date: 01 December 2016
• Published date: 01 December 2016
• DOI: http://doi.org/10.1111/jori.12071

MANAGING WEATHER RISKS:THE CASE OF J. LEAGUE

SOCCER TEAMS IN JAPAN

Haruyoshi Ito

Jing Ai

Akihiko Ozawa

ABSTRACT

Weather-related risks present significant concerns for businesses world-

wide. 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.

INTRODUCTION

Weather-related risk exposures, such as varying temperature and precipitation, are

important concerns for companies worldwide. According to the Chicago Mercantile

Exchange (CME) Group,

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one-third of businesses around the world are affected by

Haruyoshi Ito is Assistant Professor of Finance, at the Graduate School of International

Management, International University of Japan, 777 Kokusai-cho, Minami Uonuma-shi,

Niigata 979-7277, Japan. Ito can be contacted via e-mail: haru0416@gmail.com. Jing Ai is

Associate Professor of Risk Management and Insurance, at the Department of Financial

Economics and Institutions, Shidler College of Business, The University of Hawaii at Manoa,

Honolulu, HI 96822. Ai can be contacted via e-mail: jing.ai@hawaii.edu. Akihiko Ozawa is

Auditor, Hitachi Capital NBL Corporation, Nishi Shimbashi Square 9F, 1-3-1, Nishi Shimbashi,

Minato-Ku, Tokyo 105-0003, Japan. Ozawa can be contacted via e-mail: aozawaletter@yahoo.

co.jp. We would like to thank participants at the 2013 Asian Pacific Risk and Insurance

Association Annual Meeting, three anonymous referees, the editor, and Patrick Brockett for

their valuable comments. All errors are ours.

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Available at http://www.cmegroup.com/trading/weather/(accessed September 20, 2012).

© 2015 The Journal of Risk and Insurance. 83, No. 4, 877–912 (2016).

DOI: 10.1111/jori.12071

877

adverse weather conditions. In particular, 80 percent of U.S. firms and 75 percent

of Japanese firms have been exposed to weather-related risks to different extents

(Myers, 2008; Yokoyama, 2014). Weather risks are of particular interest to the leisure

and entertainment industries, such as ski resorts with snow risks (Brockett, Wang,

and Yang, 2005), golf courses and beaches with precipitation risks (Smith, 1993;

Leggio, 2007), and as we will focus on in our study, the sports industry with an

assortment of different weather risks. Some initial evidence has been provided in the

literature on varying effects of adverse weather for sports teams in different types of

sports and geographic areas (e.g., Bird, 1982; Bruggink and Eaton, 1996; DeSchriver,

2007).

In most regions of the world, weather risks have been managed more or less by

specialized insurance policies or other government-sponsored financial mechanisms

(IPCC, 2012). In the United States, these risks are now primarily managed using

weather derivative products since they became available on the CME in 1997. The

trading volume on CME was $9.4 billion from April 2010 to March 2011 with a large

number of trades (466,000 in total) (Weather Risk Management Association [WRMA],

Annual Industry Survey, 2011). Although there has been a drop from the high of over

$40 billion from April 2005 to March 2006, it is still of paramount significance.

Temperature contracts account for the great majority of CME contracts and less than 5

percent are precipitation contracts. Temperature-based weather derivatives are

primarily based on indices of heating degree days (HDD) and cooling degrees days

(CDD) and are traded for 24 U.S. cities, 6 Canadian cities, 11 European cities, 3

Australian cities, and 3 Japanese cities. Precipitation-based contracts are available for

March to October in the form of monthly contracts or seasonal contracts (2 to 8

consecutive months in length). Both futures and options contracts are available and

they are based on a precipitation index reflecting the cumulative precipitation

amount (measured in inches) for the desired time period. Futures contracts pay $500

times the respective index value, with a tick size of 0.1 inch. Option contracts have

exercise prices ranging from 0 to 20 inches for monthly contracts and 0 to 60 inch. for

seasonal contracts. The indices are currently available only for 10 U.S. cities and are

not available for other countries. In fact, most of the CME contracts are used for

weather events in different regions within North America and less than 5 percent are

used for regions outside of North America and Europe.

According to WRMA annual indus try surveys since 2001, the growi ng over-the-

counter (OTC) market plays an active role in complementing t he CME market. Of the

14 surveyed companies (WRMA mem bers in various industries suc h as banking,

insurance, and energy), a total of 9 98 OTC contracts were written from April 2010 to

March 2011, a 160 percent incre ase from the previous year. These contracts are large

with over $2 million notional v alue on average and in total, re present a volume

of $2.5 billion in 2010/2011. Thi s represents the highest total notional value since

2004/2005. Note that the per centage of OTC contracts wi th counterparties that do

not participate in the survey has been consiste ntly high over time (79 percent in t he

2011 survey). In contrast to t he CME market, precipitatio n contracts account for at

least 20 percent of the OTC co ntracts and regions outside Europe and No rth America

have a much better representation (over 10 percent in 2011 and over 20 percent in

2010).

878 THE JOURNAL OF RISK AND INSURANCE

Despite the increasing trend of contracts covering precipitation events and Asian

markets in the recent years, the weather derivatives market is still greatly dominated

by temperature contracts covering North American events. Consequently, existing

academic research has focused on temperature-based weather risks and the U.S.

market, with few exceptions (e.g., Martin, Barnett, and Coble, 2001; Skees et al., 2001;

Leggio, 2007).

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In this article, we fill in a gap by providing specific evidence on using

precipitation-based weather derivatives for managing risk exposures in an

international marketplace. Using data from the premier Japanese soccer league, we

examine its financial susceptibility to precipitation related risk, propose a weather

hedging mechanism for the league, and examine its value.

The Japanese sports industry, in particular soccer, is large and growing. Established

in 1993 with only 10 teams in total, J. League now comprises two divisions, the

premier division J1 and the lower division J2, with 38 teams in total. With a 2010

attendance of 7,928,976 (J1: 5,638,894; J2: 2,290,082), the total revenue for J. League in

2010 was US$880 million (J1: US$665 million; J2: US$215 million), or an average of

US$38 million for J1 teams and US$11 million for J2 teams. Our analysis is mainly

based on data from the J1 teams because of their popularity and financial significance.

Adverse weather conditions were not taken into consideration when most soccer

stadiums were built in Japan. Of the 49 stadiums that hosted a J. League game in 2011,

9 (18.4 percent) have roofs covering the entire stadium, 18 (36.7 percent) have partial

roofs, and 22 (44.9 percent) have no roofs at all. Since J. League never suspends a game

because of rain, spectators must watch the game in the rain, and might even have to sit

directly on the wet grass as some stadiums do not have seats.

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Although soccer games

are scheduled well in advance and teams are contractually bound to play rain or

shine, spectators can and do rely on weather forecasts when making plans to attend a

game. This exposes soccer teams to significant financial risks in ticket sales and

related revenues that are their primary sources of income. Left unmanaged, inclement

weather can be a substantial contributing factor to the average operating loss of

US$500,000 for J1 teams in 2010. This volatile financial performance might ultimately

threaten continuing corporate sponsorship, which is key to the survival of sports

teams worldwide.

Despite significant weather risks, very few teams have taken effective measures to

manage these risks. Among the 38 J. League teams, only 3 teams (Teams Shimizu, C

Osaka, and Hiroshima) purchased precipitation-based insurance contracts after it

was first introduced in Japan in 2002 (Nihon Keizai Shimbun, 2002a, 2002b). However,

according to personal interviews conducted by the authors in 2011 with J. League

managers, four out of seven showed interest in weather risk management. The

interviews also revealed concerns about the currently available risk management

methods that are expensive and time consuming. Teams can either build a new

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In untabulated analysis, we find that the correlations among temperature (HDD and CDD) and

precipitation derivatives are very low most times so the more popular temperature derivatives

cannot be used to hedge precipitation risks.

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Only typhoon, thunderstorm, eruption of volcano, and catastrophic earthquake have caused

suspension of a game.

MANAGING WEATHER RISKS FOR J. LEAGUE SOCCER TEAMS 879