Weather Derivative Pricing and the Distributions of Standard Weather Indices on Us Temperatures

Abstract

The standard indices used in the US weather derivatives market are based on monthly and seasonal heating degree days in winter and monthly and seasonal cooling degree days in summer. The pricing of weather options necessitates estimating the distribution of possible values for these indices. We assess to what extent it is safe to assume that these distributions can be modelled using a normal distribution.

Keywords: Weather derivatives, index distributions, normal distribution, non-normality

JEL Classification: G13