Weather Derivative Pricing and the Detrending of Meteorological Data: Closed-Form Solutions for the Behaviour of a Simple Decision Rule

Jewson, Stephen; Penzer, Jeremy

doi:10.2139/ssrn.618592

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Weather Derivative Pricing and the Detrending of Meteorological Data: Closed-Form Solutions for the Behaviour of a Simple Decision Rule

7 Pages Posted: 15 Nov 2004

See all articles by Stephen Jewson

Jeremy Penzer

London School of Economics

Date Written: November 11, 2004

Abstract

One of the most important decisions to make in the actuarial pricing of weather derivatives is how to detrend the historical meteorological data record. We derive expressions for the statistical behaviour of an automatic decision rule that chooses between two of the most commonly used models: flat line and linear.

Keywords: Weather derivatives, detrending, global warming

JEL Classification: G12, G13

Suggested Citation: Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Weather Derivative Pricing and the Detrending of Meteorological Data: Closed-Form Solutions for the Behaviour of a Simple Decision Rule (November 11, 2004). Available at SSRN: https://ssrn.com/abstract=618592 or http://dx.doi.org/10.2139/ssrn.618592