Science & Technology



Weather risk can move markets months in advance: Stock traders pay attention to these 2 long-range climate forecasts

Derek Lemoine, University of Arizona, The Conversation on

Published in Science & Technology News

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.

I study the impacts of weather on economic activity as an economist. In a new paper, an atmospheric scientist at NOAA and I analyzed the influence of long-range forecasts by looking at the changing prices of stock options over 10 years and thousands of companies.

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.

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.

Imagine that you know NOAA will be releasing its winter seasonal outlook in 10 days. You are considering whether to invest in a ski resort whose profits are directly tied to having a snowy, skiable winter. You expect the forecast to affect the price of the ski resort’s stock, but you don’t know which way it will go.

The more uncertain investors are about a stock’s future price, the greater their expected gains from holding the option: They get all the potential gain from big increases in the stock’s price and none of the downside risk of falling stock prices. And the greater their expected gains, the more they are willing to pay for the option and the higher the option’s price in the market. So, knowing the winter seasonal outlook is coming can make one willing to pay more for an option on the ski resort’s stock and raise the option’s price in the market.


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