NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Weather Forecasting for Weather Derivatives

Sean D. Campbell, Francis X. Diebold

NBER Working Paper No. 10141
Issued in December 2003
NBER Program(s):   AP

We take a simple time-series approach to modeling and forecasting daily average temperature in U.S. cities, and we inquire systematically as to whether it may prove useful from the vantage point of participants in the weather derivatives market. The answer is, perhaps surprisingly, yes. Time-series modeling reveals both strong conditional mean dynamics and conditional variance dynamics in daily average temperature, and it reveals sharp differences between the distribution of temperature and the distribution of temperature surprises. The approach can easily be used to produce not only short-horizon point forecasts, but also the long-horizon density forecasts of maximal relevance in weather derivatives contexts. We produce and evaluate both, with some success. We conclude that additional inquiry into nonstructural weather forecasting methods will likely prove useful in weather derivatives contexts.

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Document Object Identifier (DOI): 10.3386/w10141

Published: Sean D. Campbell & Francis X. Diebold, 2005. "Weather Forecasting for Weather Derivatives," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 6-16, March. citation courtesy of

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