It has long been thought that there is some connection between the weather and stock returns. That when the sun shines, investors feel happy, they take on more risk and prices rise; and when the weather is gloomy, investors feel likewise and prices fall.
Many academic studies have looked into this, but findings have been inconsistent. (And this year’s Almanac includes the story of our own fruitless – and expensive – attempt to find some correlation between the UK stock market and daily sun hours.)
One of the most extensive surveys was conducted by Hirshleifer and Shumway in their paper Good Day Sunshine: Stock Returns and the Weather. Hirshleifer and Shumway did find a positive correlation between equity market returrns and the amount of sunshine, but not for any other weather conditions (e.g. rain or snow).
But the author of a new paper (Michael Schneider, Under Pressure: Stock Returns and the Weather) decided to take a new approach.
Schneider took as his starting point the idea that investors have to directly experience the weather to be affected by it. For example, investors sitting in a neon-lit trading room can be largely unaware of whether it is raining outside or not. But what all people can be affected by, wherever they are, is barometric pressure.
Elsewhere, psychological studies have shown that high barometric pressure can induce positive moods, and vice versa.
Hence, Schneider ran his tests and found there was indeed a strong correlation between barometric pressure and stock returns.
- The barometric effect was greater for smaller, risker stocks.
- The result was economically as well as statistically significant.
Controlling for all all weather variables, Schneider found that it was only barometric pressure that affects equity returns.
Schneider, Michael, Under Pressure: Stock Returns and the Weather (April 28, 2013)