An accurate weather forecast is the basis for the valuation of weather derivatives, securities that partially … compensate for financial losses to holders in case of, from their perspective, adverse outside temperature. The paper analyses … precision of two forecast models of average daily temperature, the Ornstein-Uhlenbeck process (O-U process) and the generalized …

We analyze a consistent two-factor model for pricing temperature derivatives that incorporates the forward looking … structural changes and seasonality for periodic patterns. Based on the outcomes of a statistical analysis of forecast data we … conclude that the two-factor model captures well the stylized features of temperature forecast curves. In particular, a …