Climate risk and energy futures high frequency volatility prediction

This study explores the impact of climate risk on the volatility of energy futures, including heating oil, crude oil, and natural gas. In particularly, employing the heterogeneous autoregressive model and its extensions, we find that incorporating climate risk information significantly improves predictive accuracy for high-frequency volatility of energy futures both in- and out-of-sample. These results are robust across different forecasting mechanisms and periods. Additionally, we demonstrate that climate risk provides incremental information compared with existing predictors of energy futures volatility, leading to improved prediction accuracy when combining various predictors. Finally, we demonstrate that considering climate risk can lead to increased economic gains for investors in heating oil and crude oil markets. Our findings provide valuable insights for market participants in the realms of energy portfolio selection and risk management.