Weather Derivative Pricing and a Preliminary Investigation into a Decision Rule for Detrending

8 Pages Posted: 15 Nov 2004

See all articles by Stephen Jewson

Stephen Jewson

Risk Management Solutions

Jeremy Penzer

London School of Economics

Date Written: November 11, 2004

Abstract

Weather derivative pricing is often based on year-ahead forecasts of the weather made using simple statistical models and past weather data. Two of the simplest models in common use are the flat line and linear trend models. We consider the question of how to choose between these two models and test a simple decision rule based on closed-form expressions for the RMSE.

Keywords: Weather derivatives, detrending, global warming

JEL Classification: G12, G13

Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Weather Derivative Pricing and a Preliminary Investigation into a Decision Rule for Detrending (November 11, 2004). Available at SSRN: https://ssrn.com/abstract=618590 or http://dx.doi.org/10.2139/ssrn.618590

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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