Weather derivatives, which pay out based on some clearly defined meteorological measurement, have been around in America since the mid- 1990s. Earlier deregulation of American energy utilities led to a niche market in temperature derivatives, which companies could use to hedge their exposure to “cooling degree days”, when air-conditioning demand spiked, or “heating degree days”, when households and businesses fired up their radiators. In contrast to conventional forms of insurance, holders have no need to prove that they have suffered a loss themselves. Instead, derivative contracts trigger automatically when some pre-agreed parameters are met. These could be a threshold temperature, wind speed or other variable recorded in a particular place—typically an official weather station. This avoids lengthy delays in getting money to where it is most needed. Last year Jamaica’s government got a $150m payout after Hurricane Melissa’s central pressure and storm path met the criteria defined in the “catastrophe bond” the Caribbean country had issued. Rainfall derivatives are less common. The Chicago Mercantile Exchange, based in a city famous for its bone-chilling wind, launched rainfall, snowfall and frost derivatives in 2011 but scrapped them in 2014 for lack of demand. In the rich world, farmers, the most obvious beneficiaries of such protection, typically rely on crop insurance and other more conventional instruments. India’s legions of smallholders are unlikely to be rushing into the Mumbai monsoon derivatives (not least because they care about the monsoon’s effect on their tiny patch of land somewhere in the Indo-Gangetic Plain, not the coastal metropolis). Instead, NCDEX is expecting custom from large corporations. Banks with portfolios of agricultural loans may be one group of buyers. Hydropower companies, whose dams catch water from across entire river basins, may be another. Solar-power producers, it suggests, could be sellers. So could hedge funds. Whoever enters the contracts from either side must be ready to get soaked. Weather derivatives are even harder to price than stock options or commodities futures. The financial maths used in pricing conventional derivatives do not work because there is no underlying asset. Modellers must
rely on weather forecasts. These are harder to get right for rain, which is sensitive to small atmospheric changes, than for heat. Meteorologists trying to forecast monsoon rains contend with “bursts”, when clouds suddenly dump their cargo of rain in one spot, and “vagaries”, the feedback between the land and the air which can lead to sudden shifts in the timing and intensity of rain. NCDEX may also have focused on the wrong weather-related risk to start with. Temperature seems much more pertinent to India than rain. According to Pranjul Bhandari of HSBC, a bank, tracking it is now sufficient to forecast India’s food inflation. Reservoir levels, which are vulnerable to evaporation in extreme heat, matter more than rainfall to farmers who use irrigation. In contrast to grains, which can be stockpiled after a good monsoon like last year’s, perishable fruits and vegetables die in the heat and cows produce less milk. NCDEX is planning to launch a heat-linked contract one day. India’s weather-exposed businesses are hoping this financial innovation, like the monsoon, arrives soon.■ For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. This article was downloaded by zlibrary from https://www.economist.com//finance-and-economics/2026/06/04/indians-can-now-bet-on- the-monsoon
Finance & economics | Peak negativity European electricity markets have too much power They must learn to deal with it June 4th 2026 WHEN EUROPEAN regulators were tweaking the continent’s wholesale electricity markets some years ago, they added a price floor to short-circuit trading snafus. At minus €500 ($580) per megawatt-hour (MWh), it was more of a price basement. It was set so low in order to be triggered only in exceptional circumstances. May 1st, when bright sunshine and strong winds met low demand for electricity from Europeans enjoying a public holiday, may have seemed pretty ordinary. Yet the wholesale electricity price in Germany reached minus €499 per MWh. If this translated into retail prices, you would pocket €50 for charging your electric car.
For economists, the number zero is not particularly special. If a price needs to be negative to clear a market, so be it. Solar plants and wind farms produce power at near zero marginal cost when the sun is shining and wind blowing. But because that is not necessarily when people need power, and because it is costly to stop producing, they may need to pay someone to absorb the excess electricity. As more renewables plugged into Europe’s grids in the past few years, the number of hours during which buyers in the wholesale market, such as utilities and heavy industry, were paid to take electricity started rising. Obviously, negative prices offer a strong incentive for anyone who can store electricity and then sell it for more than nothing when demand returns. In sunny California, where batteries are replacing fossil energy to cover the evening demand peaks after charging during the day, the number of hours with negative prices started to decline last year. Across much of Europe, May Day notwithstanding, it is beginning to plateau (see chart 1). The market, at last, is adapting. Europe’s installed battery capacity rose by 33,000MWh in 2025, to 90,000MWh or so (see chart 2). This is enough to store as much energy as all of Europe, including Britain, generates on average every quarter of an hour. BloombergNEF, a research firm, forecasts that capacity will rise by
another 55,000MWh this year, enough to absorb roughly another ten minutes’ worth. End electricity use is also being successfully shifted into the cheaper hours of the day. Dynamic tariffs, which better reflect prices on wholesale markets, are becoming more popular, especially with owners of heat pumps and electric vehicles. Since January 2025 German providers have been required to offer customers at least one dynamic tariff. One Danish study found that though regular households mostly do not adjust demand to varying prices, those that use lots of electricity do. Another study that looked at German data from 2015-19, when those exposed to variable prices were mostly heavy users such as industry, found that price changes of about €25 per MWh led to shifts in demand of about 4%. A recent analysis by McKinsey, a consultancy, reckons that commercial and industrial consumers in Europe could save €8bn a year by 2030 if they made use of varying prices. Electrons can move across space as well as across time. That requires strong grids. Europe is belatedly getting serious about expanding these. A new cable installed last year between Sweden and Finland is one factor explaining why hours of negative prices are, California-like, already declining in both countries. The Bay of Biscay interconnector between France and Spain is under construction and due to be completed by 2028. In
2025 Germany approved plans for 2,000km of new power lines, an increase of 45% from the year before. So far in 2026 only 40 hours have been priced below minus €50 per MWh in Germany, to the relief of grid operators (who are on the hook there). Spain has had none. As the market continues to adjust, wholesale prices near zero will become more common. And with more variable tariffs, people’s electricity bills will reflect this. As they face rising inflation—which reached an annual 3.2% in the euro zone in May, owing to high oil prices— Europeans can draw comfort from that sunny prospect.■ For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. This article was downloaded by zlibrary from https://www.economist.com//finance-and-economics/2026/06/04/european-electricity- markets-have-too-much-power
Finance & economics | Buttonwood Want to know the future? Don’t trust the stockmarket Share prices are buffeted by far more than just new information June 4th 2026 “If economists wished to study the horse,” a dismal scientist once joked, “they wouldn’t go and look at horses. They’d sit in their studies and say to themselves: ‘What would I do if I were a horse?’” But at least horses tend to be spared such attention; finance types are not. And one economic idea is especially liable to get them snorting with impatience and asking whether the person who cites it has been near a trading floor. This is the efficient-market hypothesis, the formal version of which says that investors, in aggregate, perfectly and promptly incorporate new information into asset prices. Those who invoke it can often mean something even stronger: that markets therefore provide the best possible forecasts of
fundamentals like corporate earnings. In other words, the price is always right, as it surely would be if it were economists cantering around and making all the decisions. Right now this Platonic ideal feels especially remote. Retail traders clamour for meme stocks, whipping up prices just to give short-sellers a thrashing. Shares in GameStop, an ailing video-game seller selected for such favour in 2020, are still worth more than 20 times as much as they were then. They have done about as well as Nvidia’s, the biggest beneficiary so far of the artificial-intelligence revolution. Nvidia’s fellow tech giants are racing to issue new stock and sell it to the public—a sure sign that they reckon the bull market is nearing its peak. Yet investors are still happily piling in. Those financial economists who do visit the stables have known for nearly half a century that markets are far more volatile than they would be if new information were all that moved them. Robert Shiller, who won the Nobel prize in 2013, showed this for bond yields in a paper published in 1979 and for stock prices in 1981. Over the hundred years or so of data he studied, stock prices fell several times by much more than could have been justified even by a Depression-scale downturn. This made it implausible that investors were pricing shares based only on sober forecasts of their dividends. More recently Mr Shiller’s intellectual heirs have helped explain why— aside from people’s occasional tendency to bolt off and join a stampede. The most persuasive theory, held increasingly by both researchers and academically minded investors, is the “inelastic-markets hypothesis”, coined by Xavier Gabaix of Harvard University and Ralph Koijen of the University of Chicago. Its crux is that share prices, rather than being set by the dividends (or earnings) investors expect, are buffeted significantly and lastingly by capital flows. Messrs Gabaix and Koijen estimate that someone who buys $1-worth of shares with fresh cash pushes up aggregate stockmarket value by $3-8. To see why, picture three types of investor. One is a return-chaser, who buys more shares when they are on a tear and sells when prices are falling (think of retail traders or trend-following hedge funds). The second maintains fixed asset allocations: 60% to stocks and 40% to bonds, say (think of a pension