Southern oscillation: Great value of its trends for forecasting crude oil spot price volatility

An increasing number of studies have verified the impact of climate change on commodity spot markets. Based on the forecasting framework, we revisit this work by focusing on the crude oil spot markets. We employ the Southern Oscillation Index (SOI) to capture the climate changes as it determines the weather and climate of numerous living areas. To obtain a more accurate result, we apply the STL decomposition to construct a series of the GARCH-MIDAS models combining the trend, seasonal, and remainder components of SOI. The empirical results reveal that the SOI trend show significance in the in-sample estimation and the model involving it outperforms others in the out-of-sample prediction. Hence, the trend of weather and climate changes may provide greater economic value for market participants investing crude oil spot markets.