The dark comedy, Nandor Fodor and The Talking Mongoose, is the latest film from writer-director Adam Signal with Pegg starring as the title character – a Hungarian-American investigator of the paranormal, who, amongst the backdrop of British tabloid newspaper hysteria, was called to the Isle of Man in 1935 to investigate the Irving family's claims that they had discovered a talking mongoose called Gef on their farm.
Minnie Driver will play Fodor’s assistant Anne with Paul Kaye, Ruth Connell and Tim Downie also joining the cast.
The site of the filming was discovered after Minnie Driver posted two pictures of the actors to her Twitter account, with the pair posing on the banks of the River Esk, overlooking the Church of St Mary.
The duo are pictured wearing dirty, yellow overcoats with sunglasses as Pegg sports a Fedora-style hat and Driver a headscarf in Whitby marina, off Langborne Road.
Simon Pegg confirmed on an Instagram Live that he was staying near Pickering, but joked with fans: "that's where I am, but don't come and find me!"
The film, which is based on true events, entered production in Leeds with Future Artists Entertainment at the helm.
Director Adam Signal told entertainment news site Deadline: "Nandor Fodor and The Talking Mongoose is such a unique story that I couldn't believe it was true.
"There's nobody else other than Simon who could embody this character and take us on this insane journey and I can't wait to get started."
The Irving family claimed they found Gef after investigating noises coming from behind the farmhouse's wooden wall panels. The alleged creature introduced itself as a mongoose born in New Delhi, India, in 1852.
The Irvings told stories of Gef turning off the stove at night, gossiping about neighbours and waking people up who overslept, however, it was widely suspected that the family's 13-year-old daughter, Voirrey, was behind the alleged hoax.
Driver earned an Academy Award nomination for Best Supporting Actress in 1997 opposite Matt Damon in Good Will Hunting and has a catalogue of film credits
Pegg is best known for co-writing and starring in Edgar Wright's Cornetto Trilogy – Shaun of the Dead, Hot Fuzz, and The World's End.
He is set to reprise his role as Benji Dunn in the seventh instalment of the blockbuster franchise Mission: Impossible - Dead Reckoning Part One, which was filming near Scarborough in April last year.
Hollywood megastar Tom Cruise and Jeremy Renner were spotted filming fight and action scenes on a train at the North Yorkshire Moors Railway in Levisham, near Pickering.