Can the market forecast the weather better than meteorologists?
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 prot strongly depends on these indices, such as energy companies, can prot from this additional information source about future weather.
|Date of creation:||Dec 2012|
|Date of revision:|
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"Weather Forecasting for Weather Derivatives,"
Center for Financial Institutions Working Papers
02-42, Wharton School Center for Financial Institutions, University of Pennsylvania.
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