Optimal Year Ahead Forecasting of Temperature in the Presence of a Linear Trend, and the Pricing of Weather Derivatives

10 Pages Posted: 13 Jul 2004

See all articles by Stephen Jewson

Stephen Jewson

Risk Management Solutions

Jeremy Penzer

London School of Economics

Date Written: July 12, 2004

Abstract

We consider the question of how to predict air temperatures a year in advance. We introduce a new prediction scheme that generalizes the standard flat line and best fit linear trend models and gives RMSE optimal predictions when the real trend is linear.

Keywords: Weather derivatives, trends, global warming, climate change

JEL Classification: G12, G13

Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Optimal Year Ahead Forecasting of Temperature in the Presence of a Linear Trend, and the Pricing of Weather Derivatives (July 12, 2004). Available at SSRN: https://ssrn.com/abstract=563943 or http://dx.doi.org/10.2139/ssrn.563943

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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