Weather Derivative Pricing and the Detrending of Meteorological Data: Three Alternative Representations of Damped Linear Detrending

5 Pages Posted: 24 Jan 2005  

Stephen Jewson

Risk Management Solutions

Jeremy Penzer

London School of Economics

Date Written: January 24, 2005

Abstract

It is often desirable to remove the trends from historical meteorological data prior to using that data for the pricing of weather derivatives. In previous articles we have introduced the method of damped linear detrending and argued that it is an effective way to remove trends when the trends are approximately linear. In this article we show that damped linear detrending can be interpreted in three different ways: as a mixture of the linear and flat-line models, as a linear model with the trend slope reduced, and as a linear model with reverse extrapolation.

Keywords: weather derivatives, trends, detrending

JEL Classification: G12, G13

Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Weather Derivative Pricing and the Detrending of Meteorological Data: Three Alternative Representations of Damped Linear Detrending (January 24, 2005). Available at SSRN: https://ssrn.com/abstract=653241 or http://dx.doi.org/10.2139/ssrn.653241

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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