Closed Form Expressions for the Uncertainty from Linear Detrending, and the Pricing of Weather Derivatives

8 Pages Posted: 6 Jul 2004

See all articles by Stephen Jewson

Stephen Jewson

Risk Management Solutions

Jeremy Penzer

London School of Economics

Date Written: July 5, 2004

Abstract

Weather derivative pricing is often based on a statistical analysis of past weather data. Such data may be non-stationary, and detrending methods can be used to attempt to remove the non-stationarity in the mean. The performance of different methods can be compared by considering aspects of the distribution of errors in the predictions they make. In this paper we derive closed-form expressions for the mean error, error variance and mean square error for flat line and linear trend models in the case where the real trend is linear.

Keywords: weather derivatives, trends, detrending, recentering

JEL Classification: G12, G13

Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Closed Form Expressions for the Uncertainty from Linear Detrending, and the Pricing of Weather Derivatives (July 5, 2004). Available at SSRN: https://ssrn.com/abstract=561841 or http://dx.doi.org/10.2139/ssrn.561841

Stephen Jewson (Contact Author)

Risk Management Solutions ( email )

London EC3R 8NB
United Kingdom

Jeremy Penzer

London School of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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