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Can extreme weather forecasts lead to a risk premium? Evidence of a non-linear response in U.S. natural gas futures

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Listed:
  • Monteux, Manou
  • Arcuri, Maria Cristina
  • Gandolfi, Gino
  • Caselli, Stefano

Abstract

Using data on hourly frequency observed temperature and daily forecasted temperatures across major U.S. metropolitan areas over a 30-year period, we analyze the relationship between the daily returns of the NYMEX Henry Hub Natural Gas futures and U.S. weather fluctuations. We propose the existence of a novel risk premium linked to extreme weather forecasts for U.S. Natural Gas futures, which outperforms the S&P500 index on an absolute and risk-adjusted basis over a 30-year period. Our findings contribute to opening a new perspective on the non-linear interplay between weather and financial markets emphasizing the importance of these factors in financial risk management and in the context of climate change.

Suggested Citation

  • Monteux, Manou & Arcuri, Maria Cristina & Gandolfi, Gino & Caselli, Stefano, 2025. "Can extreme weather forecasts lead to a risk premium? Evidence of a non-linear response in U.S. natural gas futures," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001342
    DOI: 10.1016/j.najef.2025.102494
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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