 Market expectations of a warming climateWolfram Schlenker and Charles Taylor Journal of Financial Economics, 2021, vol. 142, issue 2, 627-640 Abstract: We compare prices of financial derivatives whose payouts are based on future weather outcomes to CMIP5 climate model predictions as well as observed weather station data across eight cities in the US from 2001 through 2020. Derivative prices respond both to short-term weather forecasts for the next two weeks and longer-term warming trends. We show that the long-term trends in derivative prices are comparable to station-level data and climate model output. The one exception is February in the northeastern US, where financial markets price in a polar vortex-induced cooling effect, a recent scientific finding that was not present in the older CMIP5 climate output. When looking at the spatial and temporal heterogeneity in trends, futures prices are more aligned with climate model output than observed weather station trends, suggesting that market participants closely align their expectations with scientific projections rather than recent observations. Keywords: Market expectations; Belief formation; Weather markets; Climate change (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:627-640 DOI: 10.1016/j.jfineco.2020.08.019 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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