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

See all articles by Stephen Jewson

Stephen Jewson

Risk Management Solutions

Jeremy Penzer

London School of Economics

Date Written: November 2004

Abstract

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

Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Weather Derivative Pricing and the Year-Ahead Forecasting of Surface Air Temperature: An Empirical Evaluation of Damped Linear Detrending (November 2004). Available at SSRN: https://ssrn.com/abstract=623381 or http://dx.doi.org/10.2139/ssrn.623381

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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