Forecasts of the weather forecast
The Economist this week reports on a new service from WSI called MarketFirst which is a forecast of the daily world weather forecast, an hour before the latter is released by the US National Oceanic and Atmospheric Administration.
“Every day, an hour before America’s National Oceanic and Atmospheric Administration releases its updated forecast for the world’s weather, WSI issues its own prediction of how the new bulletin will differ from the previous one. It does the same for the EU’s official forecast. A year’s subscription to MarketFirst, launched last November, costs $90,000, and WSI says it has already signed up a dozen customers.
MarketFirst would be of little use if it was as unreliable about the forecasts as the forecasts are about the weather. But WSI claims it is right 70% of the time. The trick, says Ira Scharf, who is in charge of selling it, is to understand the algorithms that underpin the government’s forecasts. WSI has been studying them for years to improve its own forecasts and has detected the subtle biases in both the American and European models. European weathermen, for example, underestimate temperatures for western America in spring and autumn. American ones are prone to predict chillier temperatures than they should for the period from 11 to 15 days from the time of the forecast.
The more widespread MarketFirst becomes, the less useful it will be to its subscribers, Mr Scharf concedes, since markets would begin to move in response to its release, rather than to the forecasts it anticipates. So WSI considered various methods of selling it, including releasing it earlier to certain customers for a higher fee. Another option would be to sell a forecast of the forecast of the forecast. So far, Mr Scharf says, traders do not see the need. But in the long run it is as inevitable as changes in the weather.”