Modeling the Dynamics of Temperature with a View to Weather Derivatives

Eirini Konstantinidi, Gkaren Papazian and George Skiadopoulos

Chapter 17 in The World Scientific Handbook of Futures Markets, 2015, pp 511-544 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The accurate specification of the process that the temperature follows over time is a prerequisite for the pricing of temperature derivatives. To this end, a horse race of alternative specifications of the dynamics of temperature is conducted by evaluating their out-of-sample forecasting performance under different evaluation metrics and forecast horizons. An extensive dataset of the daily average temperature measured at different locations in Europe and the United States is employed. We find that a developed principal components model and a combination forecasts model perform best in the United States and Europe, respectively. Point forecasts for popular temperature indices are formed, as well. The results have implications for the pricing and trading of the fast growing class of temperature derivatives, as well as for forecasting temperature.

Keywords: Futures Markets; Pricing; Risk Management; Futures Trading; Stock Indexes; Interest Rates; Futures Prices; Portfolio Theory; Hedge Funds; Foreign Exchange (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814566926_0017 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814566926_0017 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789814566926_0017

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().