When the sun shines do you find yourself hovering over the trading screen enthusiastically adding stocks to your portfolio? Or on cloudy days when the rain beats against the window do you sit morosely at your desk, your finger stabbing at the sell button?
Two academic papers seem to think this is how you behave. The first paper, published in 2003, analysed 26 international stock exchanges and found that sunshine was “strongly positively correlated” with market index returns. The authors attributed this to sunny weather fostering an “upbeat mood”. They even claimed it was possible (after trading costs) to trade profitably on the weather. A second paper, published in 2007, found that the sunshine effect was stronger for stock exchanges further away from the equator (e.g. exchanges in dark, gloomy northern European countries), and that the effect did not exist on the equator itself.
This seemed a fun and easy topic to study, so we dived in.
The chart below plots daily sun hours (at Heathrow) against the FTSE 100 Index return on the same day.
At first glance, you might think that the chart shows no correlation between the two series (i.e. sun hours and index returns). And you’d be right. Even second or third glances will not reveal any positive correlation. In fact, if you look very closely and squint, you may even see a negative correlation – which is not at all what we want.
We should have stopped there. But we were motivated to find some correlation. We’d read the academic papers and also paid a reasonable amount of cash for the weather data (stock tip: if the Met Office is ever privatised…).
So, on we went.
Perhaps the effect does not exist for the FTSE100 Index which, after all, is heavily influenced by foreign investors, who are trading from their pools in the Caribbean or skyscrapers in Shanghai and who are unlikely to be affected greatly by how sunny it is in Orpington. So, we looked at sun hours and the FTSE 250 Index – an index more closely reflecting UK PLC and possibly attracting more domestic investors.
No, no correlation.
Perhaps the effect really displays itself for smaller stocks? We drafted in the FTSE Small Cap Index.
The AIM market – home of optimistic punters with a sunny disposition. Surely, the sunshine effect will reveal itself there?
OK. Let’s start manipulating the data.
We calculated the average daily sun hours for the winter and summer periods, and then adjusted the daily sun hours data by calculating the daily divergence of sun hours from their seasonal average. After all, just two hours of sunshine in the winter could be considered a sunny day. That should do it.
We limited the analysis to just those days with extremes of sunshine (i.e. daily sun hours one standard deviation away from the average).
Perhaps the change in sun hours from one day to the next would work? In other words, the effect would kick in when a sunny day followed a cloudy day, or vice versa.
In desperation to rescue something from all the research, we looked at sun hours against daily trading volumes. If the curmudgeonly UK investor wasn’t inspired by the sun to increase his net equity exposure, perhaps he at least punted around a bit more. Well, finally, on this one…….
No. No correlation.
At the end of everything the best we could do was the chart below – the FTSE 250 Index plotted against the change in sun hours from the previous day.
Hardly much of an improvement on the first chart – still just a random mass of uncorrelated dots. At least the correlation is (minutely) positive, but we wouldn’t recommend trading off it.
So, who is wrong, the papers or our research?
It’s difficult to say. Our data covered the period 2007-12, while the first academic paper looked at data for the period 1982-97. Possibly the effect has changed in the intervening years.
But if the academic papers are right, and the sunshine effect does exist, this would seem to conflict with the strongest seasonality effect in the market – whereby the market in the (dark) winter months out-performs the (sunny) summer months.
Tricky thing, the market.
 Hirshleifer, D. and T. Shumway (2003). Good day sunshine: Stock returns and the weather. The Journal of Finance 58 (3)
 Keel, S. P. and M. L. Roush (2007). A meta-analysis of the international evidence of cloud cover on stock returns. Review of Accounting and Finance 6 (3)