Is the weather getting you down?

There have been quite a few academic papers written on the relationship between the weather and the stock market (links to 24 such papers are given below). Does lousy weather depress stock prices, and does the sun encourage investors to take on more risk? These are the types of questions that the papers try to answer.

In this article we’re going to look at one such paper (Dowling and Lucey, 2005), on the basis that as the authors are at Trinity College, Dublin, they may know something about rain.

The main reasoning behind most of the research into the weather and the stock market is the belief that investors’ mood influences their behaviour, and the weather can act as a proxy for mood (and, importantly, the weather can be measured). And this is the broad approach of the Dowling and Lucey paper.

Data

The paper actually tests for the relationship between daily Irish stock returns for the period 1988-2001 and eight mood proxies in total: two belief-based (lunar phases, Fri 13th), two biorhythm-based (seasonal affective disorder, daylight savings time changes), and four weather variables (cloud cover, humidity, rain and geomagnetic storms). We’ll just focus on the four weather variables here.

The objective was to determine whether below average stock returns were associated with bad weather, and above average returns with good weather.

Results

The results of their analysis on the weather variables are summarised in the following table.

Lucey_Weather, Biorhythms and Stock Returns_Table 3Source: Dowling and Lucey

Analysis

First, they were surprised to find a positive relationship between high levels of cloud cover and stock returns, however the relationship is not significant. Less surprisingly they did find a negative and significant relationship between rain and equity returns. Again, oddly, they found a positive relationship between humidity and returns. Regarding storms, there was a negative, but insignificant relationship.

They then combined all four variables to create a generalised GoodWeather variable and a BadWeather variable, but found no significant relationship with either and  market returns.

As a further study they found some preliminary support for the theory that investors’ moods are more susceptible to influence if they are already in a good mood. Investors were defined to be in a good mood if the market index 10-day moving average was above the 200-day moving average.

Conclusion

The authors found that mood states caused by the weather had influenced the stock market. Of the four weather variables they found the most significant relationship was between rain and equity returns.

So, next time you consider selling a stock look out of the window and check if your mood is being affected by the rain.


REFERENCE – WEATHER

Other articles about the weather and stock returns.

 

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