Climate Risks and the Realized Volatility Oil and Gas Prices: Results of an Out-of-Sample Forecasting Experiment

Abstract

We extend the widely-studied Heterogeneous Autoregressive Realized Volatility (HAR-RV) model to examine the out-of-sample forecasting value of climate-risk factors for the realized volatility of movements of the prices of crude oil, heating oil, and natural gas. The climate-risk factors have been constructed in recent literature using techniques of computational linguistics, and consist of daily proxies of physical (natural disasters and global warming) and transition (U.S. climate policy and international summits) risks involving the climate. We find that climate-risk factors contribute to out-of-sample forecasting performance mainly at a monthly and, in some cases, also at a weekly forecast horizon. We demonstrate that our main finding is robust to various modifications of our forecasting experiment, and to using three different popular shrinkage estimators to estimate the extended HAR-RV model. We also study longer forecast horizons of up to three months, and we account for the possibility that policymakers and forecasters may have an asymmetric loss function.

Climate Risks and Stock Market Volatility over a Century in an Emerging Market Economy: The Case of South Africa

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Do U.S. economic conditions at the state level predict the realized volatility of oil-price returns? A quantile machine-learning approach

“…Recent studies by Bouri et al. ( 2021 ) and Gupta and Pierdzioch ( 2021b ) highlight the role of global and climate risks of the overall U.S. in predicting oil price return volatility. Given the results documented by these researchers, as part of future research, it would be interesting to compare the relative importance of state-level climate risks with that of the aggregate U.S. in predicting the variability of movements of the price of crude oil, natural gas, and heating oil, because climate risks have been shown to drive state-level economic conditions in the U.S. (Sheng et al.…”

Does Climate Risk Amplify Oil Market Volatility?

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