Click to login and read the full article.
Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600
Abstract
Futures contracts on the weather may seemodd, yet weather risk can be a serious matter. Weather is plainly not a storable commodity, so the cost-of-carry pricing model does not apply. Instead, one expects a temperature futures contract to be priced close to the consensus expectation based on current information for the temperature variable at contract maturity. But everyone knows how difficult it is to predict the weather, even though some patterns are well understood (e.g., it is colder in the winter than in the summer, on average). In this article, the authors build and estimate temperature models for three major cities that have traded weather futures contracts. The models include seasonal variation, positive serial correlation over short periods, a possible longterm warming trend, and random fluctuation. To the model based on historically observed temperatures, they add forwardlooking weather forecasts from an online weather service. These forecast-augmented models are more accurate in matching market prices for weather futures, and they are even closer to futures prices than would be “perfect” forecasts constructed from realized temperature data
- © 2011 Pageant Media Ltd
Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600