Weather Derivative Pricing and the Year-Ahead Forecasting of Surface Air Temperature: An Empirical Evaluation of Damped Linear Detrending
9 Pages Posted: 26 Nov 2004
Date Written: November 2004
The pricing of temperature derivatives is often based on statistical methods that predict the surface air temperature a year in advance. We perform an empirical comparison of three simple methods for such year-ahead temperature forecasting and draw clear conclusions about their relative merits. The three methods we consider are the standard flat-line and best-fit linear detrending methods and the recently introduced damped linear detrending method.
Keywords: Weather derivatives, detrending, damped linear detrending, shrinkage
JEL Classification: G12, G13
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