Weather Derivative Pricing and the Year-Ahead Forecasting of Surface Air Temperature: A Comparison of Predictions Based on Local and Global Trend Estimates

6 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 actuarial pricing of weather swaps often depends on predicting the temperature several months in advance. Such predictions can be made by modelling the trends in historical temperature indices and extrapolating them forward in time. Linear trends are one of the simplest types of trend model one can use. They have two parameters: the mean level, and the trend rate. The mean level is probably best estimated from local data, but it is not obvious how best to estimate the trend rate: in this study we compare the performance of predictions based on local and global trend rate estimates.

Keywords: weather derivatives, trends, detrending, year-ahead forecasting

JEL Classification: G12, G13

Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Weather Derivative Pricing and the Year-Ahead Forecasting of Surface Air Temperature: A Comparison of Predictions Based on Local and Global Trend Estimates (November 2004). Available at SSRN: https://ssrn.com/abstract=623401 or http://dx.doi.org/10.2139/ssrn.623401

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
229
Abstract Views
1,800
rank
162,225
PlumX Metrics