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A comparison of temperature density forecasts from GARCH and atmospheric models

Author

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  • Roberto Buizza

    (European Centre for Medium-range Weather Forecasts, Reading, UK)

  • James W. Taylor

    (Saïd Business School, University of Oxford, UK)

Abstract

Density forecasts for weather variables are useful for the many industries exposed to weather risk. Weather ensemble predictions are generated from atmospheric models and consist of multiple future scenarios for a weather variable. The distribution of the scenarios can be used as a density forecast, which is needed for pricing weather derivatives. We consider one to 10-day-ahead density forecasts provided by temperature ensemble predictions. More specifically, we evaluate forecasts of the mean and quantiles of the density. The mean of the ensemble scenarios is the most accurate forecast for the mean of the density. We use quantile regression to debias the quantiles of the distribution of the ensemble scenarios. The resultant quantile forecasts compare favourably with those from a GARCH model. These results indicate the strong potential for the use of ensemble prediction in temperature density forecasting. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Roberto Buizza & James W. Taylor, 2004. "A comparison of temperature density forecasts from GARCH and atmospheric models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(5), pages 337-355.
    • Handle: RePEc:jof:jforec:v:23:y:2004:i:5:p:337-355
    DOI: 10.1002/for.917
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    References listed on IDEAS

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    Cited by:

    1. Meng, Xiaochun & Taylor, James W., 2022. "Comparing probabilistic forecasts of the daily minimum and maximum temperature," International Journal of Forecasting, Elsevier, vol. 38(1), pages 267-281.
    2. Marco Hening-Tallarico & Pablo Olivares, 2024. "Pricing Weather Derivatives: A Time Series Neural Network Approach," Papers 2411.12013, arXiv.org.
    3. Rosella Castellano & Roy Cerqueti & Giulia Rotundo, 2020. "Exploring the financial risk of a temperature index: a fractional integrated approach," Annals of Operations Research, Springer, vol. 284(1), pages 225-242, January.
    4. Marc Garnica-Caparrós & Daniel Memmert & Fabian Wunderlich, 2022. "Artificial data in sports forecasting: a simulation framework for analysing predictive models in sports," Information Systems and e-Business Management, Springer, vol. 20(3), pages 551-580, September.
    5. Žmuk Berislav & Kovač Matej, 2020. "Ornstein-Uhlenbeck process and GARCH model for temperature forecasting in weather derivatives valuation," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 6(1), pages 27-42, May.
    6. Eirini Konstantinidi & Gkaren Papazian & George Skiadopoulos, 2015. "Modeling the Dynamics of Temperature with a View to Weather Derivatives," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 17, pages 511-544, World Scientific Publishing Co. Pte. Ltd..
    7. Cui, Hairong & Zhou, Ying & Dzandu, Michael D. & Tang, Yinshan & Lu, Xunfa, 2019. "Is temperature-index derivative suitable for China?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    8. Huisman, Ronald, 2008. "The influence of temperature on spike probability in day-ahead power prices," Energy Economics, Elsevier, vol. 30(5), pages 2697-2704, September.
    9. Pierre-Julien Trombe & Pierre Pinson & Henrik Madsen, 2012. "A General Probabilistic Forecasting Framework for Offshore Wind Power Fluctuations," Energies, MDPI, vol. 5(3), pages 1-37, March.
    10. Caldana, Ruggero & Fusai, Gianluca & Roncoroni, Andrea, 2017. "Electricity forward curves with thin granularity: Theory and empirical evidence in the hourly EPEXspot market," European Journal of Operational Research, Elsevier, vol. 261(2), pages 715-734.
    11. Jayeong Paek & Marco Pollanen & Kenzu Abdella, 2023. "A Stochastic Weather Model for Drought Derivatives in Arid Regions: A Case Study in Qatar," Mathematics, MDPI, vol. 11(7), pages 1-18, March.

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