Hurricane Isaias and ForecastEx’s Live Hurricane Wind Gust Contracts

As of Thursday morning, October 8, ForecastEx prices give Fort Walton Beach, Florida, an 81% chance (Yes bid $0.75, No bid $0.13) of a wind gust of 70 mph or more from Isaias, the highest of the 25 locations listed for ForecastEx’s Live Hurricane contract.

Isaias became a hurricane over the southern Gulf late Wednesday, and at 7 AM CDT Thursday it was about 385 miles south-southwest of the mouth of the Mississippi River with 80 mph winds. 

The National Hurricane Center (NHC) expects it to strengthen to 110 mph, just short of major hurricane strength, by early Friday and to remain a dangerous hurricane as it approaches the northern Gulf Coast Friday night. 

Its forecast track crosses the coast near the Alabama-Florida border late Friday or early Saturday. 

ForecastEx has listed Live Hurricane contracts on Isaias for many population centers in the cone of uncertainty. Each contract asks a question of the form “Will Hurricane Isaias cause wind gusts of 70 mph or greater in Pensacola, FL?” 

The thresholds rise from 70 mph in 10 mph steps. A Yes contract pays $1 if the answer is yes and a No contract pays $1 if it is not. 

A companion contract asks which location will record the storm’s highest gust.

The contracts settle within days of the storm’s end on the peak 3-second gust over land within 10 km of each location. 

See the article on Live Hurricane Wind Gust Prediction Markets at ForecastEx for more details on the listing, trading, and settlement rules, and Reask’s write-up for further discussion of the risk transfer intent of these contracts in the context of Isaias.

Of particular note, David Schmid of Reask wrote on LinkedIn

“In a conventional parametric placement the window closes once a storm has a name. Here it opens the moment a storm starts threatening a location. Those exposed in the forecast landfall region who still want protection can buy it (Yes). Those with unused capacity willing to take the risk can deploy it (No). Both enter at a public price that updates continuously through the life of the storm. For the first time, a storm’s wind risk at specific locations has an observable market price, with LiveCyc published alongside as the fair-value reference.”

The other primary value of contracts like these is the potential for better, more dynamic hurricane forecasts than conventional systems.

ForecastEx’s daily temperature prediction markets have produced forecasts more accurate than all of the 20 established conventional systems I compared them to. That suggests prediction markets combine available information better than any one system and do so faster.

The fair-value reference for the Live Hurricane contracts is Reask’s LiveCyc system, which generates on the order of a thousand plausible wind fields for the storm, conditioned on the NHC forecast, and gives the probability that each location exceeds each threshold.

ForecastEx publishes those probabilities with each six-hourly forecast cycle. On Thursday morning, the exchange prices remained anchored to Reask’s overnight numbers. 

Fort Walton Beach was at 81% (Yes bid $0.75, No bid $0.13), up from 21% on Reask’s 12Z forecast on Wednesday, Panama City Beach at 77% (Yes bid $0.71, No bid $0.17), up from 30%, and Pensacola at 70% (Yes bid $0.64, No bid $0.24), up from 16%. Apalachicola was at 61% (Yes bid $0.55, No bid $0.33), up from 37%, and Mobile at 41% (Yes bid $0.35, No bid $0.53), up from 6%.

On the peak wind location contract, Fort Walton Beach led at 28% (Yes bid $0.25, No bid $0.69), followed by Panama City Beach at 24% (Yes bid $0.21, No bid $0.73).

From the live hurricane page. The track and cone are from NHC’s 4 AM CDT Thursday advisory, each reference location is sized by its chance of a gust over 80 mph, and regions with a major hurricane landfall contract are shaded by its Yes price. The side panel shows Panama City Beach’s ladder, with the exchange price at each listed threshold, and its chances from each Reask forecast.

From the live hurricane page. The chance of a gust at or above each threshold at six locations, from each Reask forecast since Tuesday evening (dashed) and the exchange’s Yes midpoint when each forecast arrived (solid).

Market prices do not have to align with Reask’s LiveCyc values. For instance, LiveCyc updates every six hours on the NHC, while the market can reprice constantly and incorporate new information more quickly.

For example, Reask’s 06Z forecast for Isaias, initialized at 1 AM CDT, was released at 5:56 AM CDT Thursday. An hour later, NHC’s 7 AM update put Isaias’s central pressure at 975 mb, down from 979 mb three hours earlier, with Hurricane Hunters investigating the storm. Traders can compare reports like these with the intensity forecast LiveCyc is conditioned on, and they take positions and indirectly adjust prices based on this information.

The prediction market can also improve forecasts by incorporating any better track information that is available. LiveCyc’s wind fields are centered on NHC’s official track, and there is evidence that, for example, Google DeepMind ensemble mean may outperform the official track forecast at lead times of 12 to 72 hours.

On Thursday morning NHC noted that its track forecast continues to lean more on the DeepMind ensemble mean and the HFIP Corrected Consensus Approach, which have been its best-performing track guidance this year, with the physics-based models still farther west and the AI-based models farther east.

Consider the DeepMind ensemble initialized at 00Z Thursday. Nearly all its members bring the center to the coast between Mobile Bay and Panama City Beach, mostly on Friday afternoon and evening. They are centered near Pensacola Beach and Navarre, about 30 miles east of where the NHC track crosses the coast. 

Tracks and lows from the Google DeepMind FNV3 ensemble initialized at 00Z Thursday, valid 7 PM CDT Friday. From Weathernerds.

Traders can compare that to Reask’s track. Reask’s 06Z track, which follows NHC’s, crosses the coast near the Alabama-Florida border, about 30 miles west of the center of the DeepMind ensemble.

Forecast track and wind footprint from Reask’s LiveCyc forecast for 06Z Thursday. From Reask.

The strongest winds in an Atlantic hurricane are usually on the right side of its track. A landfall further east than the NHC track would therefore raise the chance of high gusts at Fort Walton Beach and Panama City Beach relative to LiveCyc, and lower it at Pensacola. A trader who gives weight to the DeepMind ensemble can price those locations accordingly. The market price would effectively then be combining that information with LiveCyc’s.

We’ll be watching the market prices to see how they change as the storm approaches land. 

Further Reading on the Risk Hedging and Risk Transfer Applications of Hurricane Forecast Contracts

• Live Hurricane Wind Gust Prediction Markets at ForecastEx, on how the per-location wind gust contracts list, trade, and settle
• 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