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Climate risks and forecastability of the weekly state‐level economic conditions of the United States

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Listed:
  • Oguzhan Cepni
  • Rangan Gupta
  • Wenting Liao
  • Jun Ma

Abstract

In this paper, we first utilize a dynamic factor model with stochastic volatility (DFM‐SV) to filter out the national factor from the local components of weekly state‐level economic conditions indexes of the United States (US) over the period of April 1987 to August 2021. In the second step, we forecast the state‐level factors in a panel data set‐up based on the information content of corresponding state‐level climate risks, as proxied by changes in temperature and its SV. The forecasting experiment depicts statistically significant evidence of out‐of‐sample predictability over a one‐month‐ to one‐year‐ahead horizon, with stronger forecasting gains derived for states that do not believe that climate change is happening and are Republican. We also find evidence of national climate risks in accurately forecasting the national factor of economic conditions. Our analyses have important policy implications from a regional perspective.

Suggested Citation

  • Oguzhan Cepni & Rangan Gupta & Wenting Liao & Jun Ma, 2024. "Climate risks and forecastability of the weekly state‐level economic conditions of the United States," International Review of Finance, International Review of Finance Ltd., vol. 24(1), pages 154-162, March.
    • Handle: RePEc:bla:irvfin:v:24:y:2024:i:1:p:154-162
    DOI: 10.1111/irfi.12431
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    More about this item

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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