Feature engineering for improving financial derivatives-based rainfall prediction

Rainfall is one of the most challenging variables to predict, as it exhibits very unique characteristics that do not exist in other time series data. Moreover, rainfall is a major component and is essential for applications that surround water resource planning. In particular, this paper is interested in extending previous work carried out on the prediction of rainfall using Genetic Programming (GP) for rainfall derivatives. Currently in the rainfall derivatives literature, the process of predicting rainfall is dominated by statistical models, namely using a Markov-chain extended with rainfall prediction (MCRP). In this paper we further extend our new methodology by looking at the effect of feature engineering on the rainfall prediction process. Feature engineering will allow us to extract additional information from the data variables created. By incorporating feature engineering techniques we look to further tailor our GP to the problem domain and we compare the performance of the previous GP, which previously statistically outperformed MCRP, against our new GP using feature engineering on 21 different data sets of cities across Europe and report the results. The goal is to see whether GP can outperform its predecessor without extra features, which acts as a benchmark. Results indicate that in general GP using extra features significantly outperforms a GP without the use of extra features.