Tracking a rainfall index constrained by Conditional Value-at-Risk

Brian Webby, John Boland, Phil Howlett, Andrew Metcalfe


Portfolio replication is a well studied problem from finance, whereby a subset of instruments is selected to track the average movement of all such instruments. Using expected monetary value as the decision criterion for selection is a trade-off of over and under estimators. An alternate criterion developed in finance is Conditional Value-at-Risk, employed to measure and restrict excessive deviation either above or below the centre. That same objective may be useful in monitoring environmental variables where the exclusion or inclusion of extreme values may be critical to representing the features of interest of the variable. We demonstrate the application of the risk measure to meteorological data in Australia, selecting a weighted combination of stations to best track an index of average annual rainfall.

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ANZIAM Journal, ISSN 1446-8735, copyright Australian Mathematical Society.