No Chills or Burns from Temperature Surprises: An Empirical Analysis of the Weather Derivatives Market

摘要

This article examines the efficiency of the weather futures market traded on the CME in both HDD and CDD futures contracts in 18 cities across the United States. Efficiency is examined in three ways. First, by comparing the market's implied forecasts for the weather against other forecasts. Second, by looking at whether market's overreact or under-react to temperature surprises. Third, by looking at weather derivative patterns across cities. We find that generally the market seems very efficient despite its lack of liquidity. We also find risk premia that seem to vary across cities and over time.