The pricing of temperature futures at the Chicago Mercantile Exchange

Gregor Dorfleitner and Maximilian Wimmer

Journal of Banking & Finance, 2010, vol. 34, issue 6, 1360-1370

Abstract: This paper analyzes observed prices of US temperature futures at the Chicago Mercantile Exchange (CME). Results show that an index modeling approach without detrending captures the prices exceptionally well. Moreover, weather forecasts significantly influence prices up to 11 days ahead. It is shown that valuations of temperature futures relying on a model without detrending yield biased valuations by overpricing winter contracts and underpricing summer contracts. Several trading strategies are devised to exploit the mispricing observed at the CME and to demonstrate that speculating on temperature futures can not only generate high overall returns, but also perform well on a risk-adjusted basis.

Keywords: Weather; derivatives; Index; modeling; Weather; forecast; Futures; pricing; Trading; strategy (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:6:p:1360-1370

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