Can the market forecast the weather better than meteorologists?

Matthias Ritter

No 2012-067, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Many companies depend on weather conditions, so they require reliable weather forecasts for production planning or risk hedging. In this article, we propose a new way of gaining weather forecasts by exploiting the forward-looking information included in the market prices of weather derivatives traded at the Chicago Mercantile Exchange (CME). For this purpose, the CME futures prices of two monthly temperature indices relevant for the energy sector are compared with index forecasts derived from meteorological temperature forecasts. It turns out that the market prices generally outperform the meteorological forecasts in predicting the outcome of the monthly index. Hence, companies whose profit strongly depends on these indices, such as energy companies, can profit from this additional information source about future weather.

Keywords: Weather derivatives; weather forecasts; CME; energy sector (search for similar items in EconPapers)
JEL-codes: G15 G17 Q41 Q47 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2012-067

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