Information, Trading and Volatility: Evidence from Weather-Sensitive Markets

Abstract

We find that the trading- versus nontrading-period variance ratios in weather-sensitive markets are lower than those observed in the equity market and higher than those observed in the currency market. We also find that the variance ratios are substantially lower during periods of the year when prices are most sensitive to the weather. Moreover, the comovement of returns and volatilities for related commodities is stronger during the weather-sensitive season and this increase is driven by stronger comovement during non-trading periods. These results are consistent with a strong link between prices and public information flow and cannot be explained by pricing errors or changes in trading activity.

Keywords: Variance ratios, excess volatility, public information, commodity futures

JEL Classification: G12, G14