Eller College of Management Study Finds Long-Range Forecasts by the U.S. Government Valuable for Market Traders

May 15, 2024

Derek Lemoine, director of graduate studies and professor of economics in the Eller College of Management recently co-published a study that examines which of the many long-range forecasts of the U.S. government are of particular value and to whom.

“The U.S. government produces forecasts of what weather (“seasonal climate”) will be many months out. In particular, it forecasts how active the hurricane season will be, what the winter will be like and what the state of El Nino will be,” Lemoine explains. “We use the prices of financial instruments to test whether market traders want to know these forecasts.”

Through his research in collaboration with Sarah Kapnick of the National Oceanic and Atmospheric Administration (and formerly the Geophysical Fluid Dynamics Laboratory of the National Oceanographic and Atmospheric Administration), the study found that market traders do indeed care what these long-range forecasts are and that the weather they are forecasting will matter to firms’ stock prices.  

“You might think that long-range weather would only matter for sectors like agriculture, but we show that traders believe it matters for firms throughout the economy,” Lemoine says, adding their research shows the forecast that has the most impact will be released on the second Thursday of June (June 13, 2024).

Key findings from the study include:

  • The weather over a season (and especially the state of El Nino) matters for firms throughout the economy.
  • Traders are willing to pay a premium to hedge against whatever the forecasts of that weather will turn out to say.
  • The production of long-range forecasts by the U.S. government is an activity that markets find valuable.