Development of standardized data sets for weather derivatives

Heating and cooling degree day contracts are the most common weather derivative transactions. These contracts are based partly on estimates of climatological variability determined from historical records. Most parties that trade weather derivatives develop their own version of a homogeneous data set for a given weather station. There will most likely be differences among the different data sets for a given station, and these differences can increase the risk (and cost) associated with a contract. The development of standardized homogeneous data sets for a selection of weather stations should facilitate the trading of degree day contracts via their use as a common reference for all parties. This talk will focus on some of the issues involved in developing a public, standardized data set of temperature for a variety of stations.