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.
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.
The results of their analysis on the weather variables are summarised in the following table.
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.
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
- Weather-Induced Mood, Institutional Investors, and Stock Returns, Goetzmann, William N. and Kim, Dasol and Kumar, Alok and Wang, Qin (Emma) (2013)
- Under Pressure: Stock Returns and the Weather, Michael Schneider (2013)
- A cloudy day in the market: short selling behavioural bias or trading strategy, Watson, Ethan and Mary C. Funck (2012)
- On the relationship between weather and stock market returns, Floros, Christos (2011)
- Analysis of the Impact of Weather on Trading in Equity Markets, David Havlíček (2010)
- Does the weather affect stock market volatility?, Symeonidis, Lazaros and George Daskalakis and Raphael N. Markellos (2010)
- Is it the weather? Response, Jacobsen, Ben and Wessel Marquering (2009)
- Weather and intraday patterns in stock returns and trading activity, Chang, Shao-Chi and Sheng-Syan Chen and Robin K. Chouc and Yueh-Hsiang Lin (2008)
- Are Weather Induced Moods Priced in Global Equity Markets?, Dowling, Michael M. and Lucey, Brian M (2008)
- Is it the weather?, Jacobsen, Ben and Wessel Marquering (2008)
- Stock purchase and the weather: Individual differences, Levy, Ori and Itai Galili (2008)
- Macroeconomic news and stock market calendar and weather anomalies, Gerlach, Jeffrey R. (2007)
- A meta-analysis of the international evidence of cloud cover on stock returns, Keef, Stephen P.; Roush, Melvin L (2007)
- Whether the weather: A comprehensiveassessment of climate effects in the Australian stockmarket, Andrew C Worthington (2006)
- Information, Trading, and Volatility: Evidence from Weather-Sensitive Markets, Fleming, Jeff and Chris Kirby and Barbara Ostdiek (2006)
- Weather, Biorhythms and Stock Returns – Some Preliminary Irish Evidence, Dowling, Michael and Brian M. Lucey (2005)
- Rain or Shine: Where is the Weather Effect?, Goetzmann, William N. and Ning Zhu (2005)
- Weather, Stock Returns, and the Impact of Localized Trading, Loughran, Tim and Schultz, Paul H (2004)
- Do Cloudy Days Affect Stock Exchange Returns: Evidence from Istanbul Stock Exchange , Tufan, Ekrem and Hamarat, Bahattin (2004)
- Good day sunshine: Stock returns and the weather, Hirshleifer, D. and T. Shumway (2003)
- Good Day Sunshine: Stock Returns and the Weather, David A. Hirshleifer,Tyler Shumway (2001)
- Stocks and the Weather: An Exercise in Data Mining or Yet Another Capital Market Anomaly?, Kraemer, Walter and Runde, Ralf (1997)
- Stock Prices and Wall Street Weather: Additional Evidence, Trombley, Mark A. (1997)
- Stock prices and Wall Street Weather, Saunders, Jr, E. M. (1993)
Other articles about the weather and stock returns.