The volatility in the number of days of road closure is calculated in the same way the volatility of a stock price can be empirically obtained by observing fixed intervals of time (Hull, 2009). Based on the records from the environment agency, Table 1 shows the number of days of road closure from 1988 to 2002 and the associated total costs (Ct) as a function of road closure.
The yearly return (ui) is calculated by:
The volatility is given by:
From equation 2 and 15 observations (n), the ...