To understand how important weather and climate risks are to the economy, watch investors. New research shows that two long-range seasonal weather forecasts in particular can move the stock market in interesting ways.
We often think about forecasts as telling us what the weather will bring in coming days, but the National Oceanic and Atmospheric Administration also predicts weather conditions several months out. These seasonal climate outlooks tell us whether the hurricane season is likely to be active, whether the winter is likely to be snowy or cold, and whether an El Niño or La Niña climate pattern is likely to emerge with the potential to influence weather across the U.S.
We found that investors are paying millions of dollars to hedge the risks of what NOAA’s seasonal outlooks might say. Their bets suggest that seasonal climate matters for the success of companies throughout the economy, even in sectors that might not seem especially exposed to weather.
Betting on seasonal forecasts in options markets
When you buy a stock, you buy a share of ownership in a company. The value of that stock is tied to the company’s expected future profits.
When you buy a stock option, you pay for the right to buy a particular stock at a particular price on some particular future date. Importantly, the option is just that: an option to buy, not a requirement to buy. You’ll pay a premium for this flexibility.
If the stock’s value falls, then you can just let the option expire and all you’ve lost is the premium. But if the stock price rises enough, you can exercise the option and buy the stock at the lower price built into the option. Another type of option, called a “put,” lets you sell stock you already own in a similar way.
The prices of these options tell us how uncertain investors are about the future economy.
To understand how important weather and climate risks are to the economy, watch investors. New research shows that two long-range seasonal weather forecasts in particular can move the stock market in interesting ways.
We often think about forecasts as telling us what the weather will bring in coming days, but the National Oceanic and Atmospheric Administration also predicts weather conditions several months out. These seasonal climate outlooks tell us whether the hurricane season is likely to be active, whether the winter is likely to be snowy or cold, and whether an El Niño or La Niña climate pattern is likely to emerge with the potential to influence weather across the U.S.
We found that investors are paying millions of dollars to hedge the risks of what NOAA’s seasonal outlooks might say. Their bets suggest that seasonal climate matters for the success of companies throughout the economy, even in sectors that might not seem especially exposed to weather.
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