Statistical analysis of model risk concerning temperature residuals and its impact on pricing weather derivatives

► We model the daily average temperature via an extended Ornstein Uhlenbeck process. ► We assume that the residuals are driven by a Levy process. ► We compare the prices of January 2010 out of the money options for Ljubljana and Maribor. ► Prices obtained using NIG and VG distributed disturbances fit well to the results obtained by bootstrapping the residuals.