Financial markets value skillful forecasts of seasonal climate

Details

• Journal Title:
  Nature Communications
• Personal Author:
  Lemoine, Derek ; Kapnick, Sarah
• NOAA Program & Office:
  OAR (Oceanic and Atmospheric Research) ; GFDL (Geophysical Fluid Dynamics Laboratory)
• Description:
  Scientific agencies spend substantial sums producing and improving forecasts of seasonal climate, but they do so without much information about these forecasts’ value in practice. Here we show that financial market participants value the production of seasonal forecasts: options traders price the uncertainty generated by upcoming United States National Oceanic and Atmospheric Administration Winter and El Niño Outlooks. Each outlook affects firms throughout the economy, with total market capitalization of $6 and $13 trillion, respectively. A 1% improvement in the skill of the El Niño Outlook reduces firms’ exposure to a one standard deviation shock by $18 billion and induces traders to spend an additional $2 million hedging the outlook’s news. Firms must not be able to undertake ex-ante adaptation that would eliminate their exposure to the forecasted portion of seasonal climate without imposing substantial costs of its own.
• Source:
  Nature Communications, 15(1)
• DOI:
  https://doi.org/10.1038/s41467-024-48420-z
• ISSN:
  2041-1723
• Format:
  pdf
• Publisher:
  Springer Science and Business Media LLC
• Document Type:
  Journal Article
• Funding:
  Grant no. NA18OAR4310261
• License:
  https://creativecommons.org/licenses/by/4.0
• Rights Information:
  CC BY
• Compliance:
  Library
• Download URL:
  https://repository.library.noaa.gov/view/noaa/67807/noaa_67807_DS1.pdf
• File Type:
  [PDF - 1.38 MB]
• Collection(s):
  Office of Oceanic and Atmospheric Research (OAR)
• Main Document Checksum:
  urn:sha-512:ad1ffd496dafccfc9432440d9fb6cc3bb85f812449ca2136e3ad7b7ffbbe42b23cb2dd6d60cd57713e35a4e46df7203f31d265575c4e96eb79df6f7d2a2e162b