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.


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.

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


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.


Other articles about the weather and stock returns.


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Sun and the stock market

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[1], 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[2], 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.

Sun hours v FTSE 100 Index

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.

No correlation.

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.

[1] Hirshleifer,  D. and T. Shumway (2003). Good day sunshine:  Stock returns and the weather. The Journal of Finance 58 (3)

[2] 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)

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The pressure on investors

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.


  1. The barometric effect was greater for smaller, risker stocks.
  2. 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)

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