Global climate change and commodity markets: A hedging perspective

Abstract

This paper aims to measure the tail‐risk dependence between climate change and commodity futures markets. We utilize Morgan Stanley Capital International Climate Change Index (CCI) to serve as a proxy indicator of the stock market climate change for examining the tail‐risk spillover effect among 16 major commodity futures. Using GARCH–Copula–CoVaR framework, we show that extreme climate change has a significant tail‐risk spillover effect on commodity futures markets, in which agricultural and energy futures are affected by climate change most. We then adopt the copula‐based generalized autoregressive conditional heteroskedasticity (GARCH) model to compute the optimal hedge ratio among each pair of CCI with commodity futures, which performs well economic advantages for all 16 commodities. Compared with hedging against commodity index, CCI has a more significant hedging effect on metal and energy subindex futures. Therefore, we finally suggest an effective hedging portfolio composed of CCI and subindex futures in a significant economic sense.

Air pollution, weather factors, and realized volatility forecasts of agricultural commodity futures

“…Second, sudden climate events (e.g., floods, tornadoes, hurricanes, and high temperatures) or long-term climate changes (e.g., global warming, sea level rise, precipitation change, and ocean acidification) can change the distributions and behaviors of creatures and animals, which would influence agricultural productivity in the long term (Chen et al, 2011;Lobell & Gourdji, 2012). Extreme climate change also has a significant tail-risk spillover effect on commodity futures markets (Jia et al, 2023). By analyzing granular daily data on temperatures across the continental United States from 1990 to 2015, Addoum et al (2020) find no significant evidence to suggest that temperature exposures have a direct effect on sales or productivity at the establishment level.…”