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. •The climate risk index (CRI) can enhance in- and out-of-sample prediction accuracy of energy futures volatility.•The predictive performance of CRI is better during economic recessions.•The robustness of our findings is confirmed through multiple checks.•CRI exhibits superior forecasting efficacy compared to existing factors.•The consideration of CRI can improve economic values for energy investment, especially during economic recessions.