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Predicting natural gas futures’ volatility using climate risks

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  • Guo, Kun
  • Liu, Fengqi
  • Sun, Xiaolei
  • Zhang, Dayong
  • Ji, Qiang

Abstract

In this paper, we examine the tracking and predictive power of two kinds of climate risks—namely, climate policy uncertainty (CPU) and climate-related disasters—on the price volatility of natural gas futures. The GARCH-MIDAS model was adopted to incorporate daily natural gas futures prices with monthly CPU indices and disaster frequencies. The empirical results showed a robust predictive relationship between disaster frequency and natural gas price volatility under both in-sample and out-of-sample scenarios, while combining the CPU index with other predictors could not improve the out-of-sample forecasting performance. We believe these findings could provide insights for traders and market regulators.

Suggested Citation

  • Guo, Kun & Liu, Fengqi & Sun, Xiaolei & Zhang, Dayong & Ji, Qiang, 2023. "Predicting natural gas futures’ volatility using climate risks," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002878
    DOI: 10.1016/j.frl.2023.103915
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    2. Chen, Shengming & Bouteska, Ahmed & Sharif, Taimur & Abedin, Mohammad Zoynul, 2023. "The Russia–Ukraine war and energy market volatility: A novel application of the volatility ratio in the context of natural gas," Resources Policy, Elsevier, vol. 85(PA).
    3. Jaeseok Yun & Sungyeon Kim & Jinmin Kim, 2024. "Digital Twin Technology in the Gas Industry: A Comparative Simulation Study," Sustainability, MDPI, vol. 16(14), pages 1-29, July.
    4. Kuang, Hewu & Liang, Yiyan & Zhao, Wenjia & Cai, Jiahong, 2023. "Impact of natural resources and technology on economic development and sustainable environment – Analysis of resources-energy-growth-environment linkages in BRICS," Resources Policy, Elsevier, vol. 85(PB).
    5. Liu, Changyu & Wang, Jing & Ji, Qiang & Zhang, Dayong, 2024. "To be green or not to be: How governmental regulation shapes financial institutions' greenwashing behaviors in green finance," International Review of Financial Analysis, Elsevier, vol. 93(C).

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