Can extreme weather forecasts lead to a risk premium? Evidence of a non-linear response in U.S. natural gas futures

Using data on hourly frequency observed temperature and daily forecasted temperatures across major U.S. metropolitan areas over a 30-year period, we analyze the relationship between the daily returns of the NYMEX Henry Hub Natural Gas futures and U.S. weather fluctuations. We propose the existence of a novel risk premium linked to extreme weather forecasts for U.S. Natural Gas futures, which outperforms the S&P500 index on an absolute and risk-adjusted basis over a 30-year period. Our findings contribute to opening a new perspective on the non-linear interplay between weather and financial markets emphasizing the importance of these factors in financial risk management and in the context of climate change.