Discussion: German economists tackle weather forecasting

http://ideas.repec.org/p/hum/wpaper/sfb649dp2012-0...

Oh yeah, congratulations to Cassie, offspring, and extended family.

Perhaps in that case meteorologists are better at forecasting the market, because economists sure as hell can't. Any tips, Blair?

Just what we need.. energy companies hedging using an index based upon their own hedges.

The problem with the original paper (which found that 'forecasts' inferred from the market price of derivatives contracts based on weather indices outperformed weather forecasts) is that the weather forecasts used for comparison were from an Internet site and would, I expect, have been raw output from a single model without bias correction. This, in turn, means that if the actual location being forecast for had a different climate to its nearest gridpoint (as could happen in complex topography, or near a body of water), you would expect the forecasts to have a systematic bias relative to reality, and it's not surprising that the market (which was probably guided pretty heavily by more sophisticated weather forecasts, either from the National Weather Service or private operators) would perform better in such circumstances. It would be interesting to see a similar study using, say, NWS forecasts.

So the headline should be... market watchers are more sophisticated users of meterological models than econmetric researchers. His conclusion should be,, if you don't understand how to use the models, use the market indices derived from the models.