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Meteorological forecasts and the pricing of weather derivatives
Humboldt-Universität zu Berlin, Germany; Georg-August-Universität Göttingen, Germany.ORCID iD: 0000-0003-2543-3673
Georg-August-Universität Göttingen, Germany.
Humboldt-Universität zu Berlin, Germany.
2010 (English)Report (Other academic)
Abstract [en]

In usual pricing approaches for weather derivatives, forward-looking information such as meteorological weather forecasts is not considered. Thus, important knowledge used by market participants is ignored in theory. By extending a standard model for the daily temperature, this paper allows the incorporation of meteorological forecasts in the framework of weather derivative pricing and is able to estimate the information gain compared to a benchmark model without meteorological forecasts. This approach is applied for temperature futures referring to New York, Minneapolis and Cincinnati with forecast data 13 days in advance. Despite this relatively short forecast horizon, the models using meteorological forecasts outperform the classical approach and more accurately forecast the market prices of the temperature futures traded at the Chicago Mercantile Exchange (CME). Moreover, a concentration on the last two months or on days with actual trading improves the results. 

Place, publisher, year, edition, pages
Berlin: Humboldt-Universität zu Berlin , 2010. , p. 24
Series
SFB 649 Discussion Paper, ISSN 1860-5664 ; 2010-043
Keywords [en]
Weather forecasting, weather risk, price forecasting, Financial markets, temperature futures, CME
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-55251OAI: oai:DiVA.org:hj-55251DiVA, id: diva2:1616851
Available from: 2021-12-04 Created: 2021-12-04 Last updated: 2021-12-04Bibliographically approved

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Ritter, Matthias

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CiteExportLink to record
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Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
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Output format
  • html
  • text
  • asciidoc
  • rtf