Hurricane Isaias Represents the First Full Run of ForecastEx’s Live Hurricane Contracts

Hurricane Isaias marked the first time ForecastEx’s Live Hurricane contracts for an Atlantic hurricane progressed through the full life cycle, from storm formation to contract listing to settlement. All contracts settled shortly after landfall, with the peak gust registering at Fort Walton Beach at 144 mph.

Image from NOAA/NESDIS STAR (GOES-19 GeoColor, 5:30 PM CDT Friday, October 9).

The precursor thunderstorms of Isaias simmered for over a week in the southwestern Gulf, eventually organizing and becoming a named tropical storm on Wednesday, October 7. That night, the system crossed the Gulf toward the Florida Panhandle while strengthening into a hurricane. At 7:20 AM CDT on Friday, the system became a major hurricane with maximum sustained 1-minute winds of 120 mph, before weakening due to strong wind shear just ahead of landfall at 8:30 PM CDT Friday. The National Hurricane Center’s 4:00 PM CDT Friday discussion noted that it was “very likely that Isaias will be a gustier-than-normal hurricane when it makes landfall.” 

ForecastEx’s Live Hurricane contracts ask questions of the form “Will Hurricane Isaias cause wind gusts of 100 mph or greater in Fort Walton Beach, FL?” Contracts are listed for a named storm once the tropical cyclone analytics firm Reask forecasts a meaningful chance, around 5%, of a gust of 70 mph or greater. Reask also serves as the settlement agency for the contracts. 

For Isaias, ForecastEx listed 25 locations on Wednesday, October 7th. Nineteen were in Florida, and the others were Mobile, Gulfport, New Orleans, Brunswick, Savannah, and Río Lagartos in Mexico. Every location surfaced a 70 mph contract, and Pensacola, Fort Walton Beach, Panama City Beach, and Apalachicola had thresholds up to 110 mph. On Friday, after Isaias became a major hurricane, ForecastEx raised thresholds to 150 mph for Fort Walton Beach, 140 mph for Pensacola, and 120 mph for Apalachicola.

Bloomberg TV began displaying Live Hurricane probabilities from ForecastEx on Thursday, October 8th. 

Screenshot of Bloomberg TV from the morning of Thursday, October 8th. 

When Hurricane Isais made landfall at 8:30 PM CDT Friday, October 09 it was a Category 2 hurricane with 105 mph 1-minute maximum sustained winds.

However, these contracts settle on the highest 3-second gust that Reask calculates over the course of the storm because 3-second gusts better predict structural damage than the 1-minute sustained winds used to determine a hurricane’s Saffir-Simpson category.

The peak gust calculations at the most relevant locations are shown below. 

From the hurricane decision support page. The peak gust at each reference location in Reask’s Metryc product.

Reask calculated a 144 mph gust at Fort Walton Beach, which was 37% above the 105 mph 1-minute maximum sustained winds at landfall. However, World Meteorological Organization guidance (Harper, Kepert and Ginger 2010) indicates that 3-second gusts over land tend to be roughly 25% to 40% above the 1-minute sustained value, so this Fort Walton Beach gust falls within that range and is consistent with NHC’s expectation of a gustier-than-normal hurricane. 

A companion contract also asked which location would record the storm’s highest gust. Fort Walton Beach became the favorite over the field late Thursday and never relinquished it.

From the hurricane decision support page. The exchange price for each location on the peak wind location contract. Powered by Reask

A major feature of Reask’s virtual anemometer method is that it can fill in missing information even when instruments fail or stop reporting.

According to airport records archived by the Iowa Environmental Mesonet, the weather station at Hurlburt Field, about 7 km from Fort Walton Beach’s reference point, sent no reports during the storm’s peak, from 5:10 PM CDT Friday until 2:55 AM Saturday. Similarly, the station at Naval Air Station Pensacola, 12 km from Pensacola’s reference point, sent no reports from 4:56 PM to 10:49 PM. Those failures make anemometers unacceptable for settling contracts with money riding on them and demonstrate the necessity and value of a calculation methodology like Reask’s.

Given that this was the inaugural test of the Live Hurricane contracts and most potential participants were likely unfamiliar with them, expectations for initial trading volume were modest. That expectation held as the contracts traded, but only in small retail sizes. Trading was concentrated at six locations with some of the highest wind-speed probabilities (Fort Walton Beach, Panama City Beach, Apalachicola, Pensacola, Tallahassee, and Mobile) and in the hours leading up to and just following landfall. 

However, each Atlantic storm is an opportunity to build familiarity and demonstrate the mechanics of these contracts so retail traders, market makers, and institutions feel comfortable trading them for future storms. 

Further Reading 

• Accuracy of prediction markets in physical variables like temperature
• Live Hurricane Wind Gust Prediction Markets at ForecastEx, on how the per-location wind gust contracts list, trade, and settle
• Hurricane Isaias and ForecastEx’s Live Hurricane Wind Gust Contracts, the introduction to the contracts for Isaias
• Friday 10/9 Update on ForecastEx’s Live Hurricane Contracts for Hurricane Isaias, on the highest gust thresholds on the day of landfall
• Using ‘Live Hurricane’ ForecastEx Contracts to Hedge a Home Insurance Deductible: A Worked Example from Hurricane Ian
• Neighbourhood-scale wind data powers new live hurricane risk transfer contracts, on how Metryc settles the contracts and how LiveCyc serves as their fair-value reference
• Hurricane Forecast Contracts, on how the count and landfall contracts work
• Disaster Insurance Applications of Forecast Contracts, on using landfall contracts as parametric cover
• Hurricane Forecast Contracts as a Diversifying Asset in an Investment Portfolio, on their correlation with conventional assets
• Bundling “NO” Hurricane Landfall Forecast Contracts to Reduce Downside Risk, on constructing a bundle across locations