Managing Drought Related Financial Risks with Water Futures

Managing Drought Related Financial Risks with Water Futures | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Article Managing Drought Related Financial Risks with Water Futures Dan Li, Rohini Gupta, Harrison Zeff, Gregory Characklis This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-8275145/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract Water is an essential resource for agricultural and municipal interests, and increasing water scarcity poses a fundamental risk for water users and suppliers worldwide. Although well-designed water markets can ease these pressures by reallocating limited supplies to high value uses, markets in water-scarce regions are often thin and volatile. Interannual hydrologic variability can drive sharp price fluctuations, exposing both buyers and sellers to significant financial risk. Using California as a case study, which operates one of the world’s most active and institutionally complex water markets, we combine water price indices with a century of streamflow data and a detailed simulation of California's supply system to predict future prices at 1-, 3-, and 6-month horizons that match typical decision timeframes. Our results reveal strong short-term predictability from lagged prices and increasing dominance of reservoir storage at longer horizons, with r² values of 0.90, 0.79, and 0.61 for 1-, 3-, and 6-month forecasts. Hedging strategies that incorporate forecast-uncertainty filters reduce tail risk and expected water costs by 14.1% and 16.7%, respectively, when using 6-month futures with a 50% hedging target. This scalable framework offers a structured way to quantify forecast capacity and assess financial risk management strategies in water markets. Earth and environmental sciences/Natural hazards Earth and environmental sciences/Environmental sciences/Environmental impact Earth and environmental sciences/Hydrology Full Text Additional Declarations There is NO Competing Interest. Supplementary Files SupportingInformation.docx Supplementary materials for review Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. 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