Weather Derivative Pricing and the Impact of El Nino on Us Temperature: The Statistics of Optimal Categorical Predictions

6 Pages Posted: 24 Jan 2005

See all articles by Stephen Jewson

Stephen Jewson

Risk Management Solutions

Jeremy Penzer

London School of Economics

Date Written: January 24, 2005

Abstract

Seasonal forecasts of US temperature have the potential to improve weather derivative pricing. One way to produce such forecasts is to divide the range of possible Pacific ocean surface temperatures into three categories and look at the US temperatures that occur for each category. Unfortunately this approach is hampered by weak signals and lack of data. We perform a statistical analysis of this problem and derive expressions for optimal forecasts that take into account the weakness of the signal and the small sample sizes.

Keywords: weather derivatives, ENSO, El Nino, La Nina, seasonal forecasts

JEL Classification: G12, G13

Suggested Citation

Jewson, Stephen and Penzer, Jeremy, Weather Derivative Pricing and the Impact of El Nino on Us Temperature: The Statistics of Optimal Categorical Predictions (January 24, 2005). Available at SSRN: https://ssrn.com/abstract=653242 or http://dx.doi.org/10.2139/ssrn.653242

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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