Financial Markets and Climate Models: An Empirical Study on Corn Futures
42 Pages Posted: 24 Feb 2019
Date Written: February 7, 2019
Some economic sectors — particularly agriculture — are sensitive to weather conditions and hence to the accuracy of available forecasts. Unfortunately, even forecasts of the near future made by the most advanced climate models suffer from relatively low accuracy due to imperfect modeling of the climate system with its highly complex and uncertain nature. Participants in the markets for agricultural commodities would therefore benefit from improved prediction systems — such systems would facilitate better knowledge about the harvest in the coming season and suggest better strategies to be deployed on financial markets. If the markets are efficient, the prices of those commodities sensitive to weather are expected to reflect the best knowledge about the conditions for the following growing seasons.
In this paper we look for evidence that the expectations of the financial markets for the coming growing seasons are superior to those formed purely from publicly available climate forecasts. We analyze the accuracy of the climate forecasts across corn growing areas of the largest producer of corn — the US — and find no evidence of corn futures markets having more information about future climate conditions than that contained in the publicly available forecasts of the multi-model ensemble studied here.
JEL Classification: Q54, Q14, G14
Suggested Citation: Suggested Citation