The effect of weather on stock returns: A comparison between emerging and developed markets
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Irina Prodan
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The effect of weather on stock returns: A comparison between emerging and developed markets
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Anchor Academic Publishing
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9783954895564
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1
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CHF 22.30
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Wirtschaft
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English
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54
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kein Kopierschutz/DRM
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PC/MAC/eReader/Tablet
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PDF
One renowned and frequently researched anomaly over the last two decades is the weather effect, more precisely, the impact of weather on stock market returns. The extensive literature on the weather effect fails to converge towards a unique, systematic and robust relationship between the weather, and the stock market. Therefore, the aim of this paper is to explain the contradictory results in the literature by testing whether stock prices are affected by the weather in a significantly different manner depending on the level of market development, and explaining how this difference behaves over time. In order to test for this, city-by-city, pooled and binary regressions are employed using data of 10 developed, and 10 emerging countries over the period 1996-2011 by using two different means of seasonal adjustment.
Irina Prodan received her bachelor’s degree magna cum laude from the faculty of Finance, Banking, Insurance and Stock Exchange at the Bucharest Academy of Economic studies. That degree was followed by a master’s degree at the Vrije Universiteit, Amsterdam
Text Sample: Chapter 2.2, Weather and the stock market: The literature connecting investor weather and stock market returns is differentiated based on the researched location. Saunders (1993) is the first one to investigate the United States market and find support for the influence of investors' mood - which is affected by weather - on asset prices. The study showed that the weather in New York City had a significant correlation with the daily returns on the NYSE and AMEX index over 1962-1989 and the Dow Jones Industrial Average over the period 1927-1989. The amount of cloud cover (used as a proxy for the inverse of sunshine) was negatively related to the returns on the stock market. Also, the results are robust to the inclusion of other market anomalies. Further, the effect of extreme weather on market returns is even larger. In addition to this study, Chang, Chen, Chou and Li (2008) also found that the stock market returns on the NYSE on cloudy days are lower than on sunny days. However, the influence of the cloud cover is only significant at the opening of the market (12-15 minutes). The findings also show that weather has a significant influence on the intraday trading patterns. The cloud coverage is positively related to the volatility in the market and negatively related to the market depth. Akhtari (2011) investigated the relationship between weather and stock market returns over time. She also found a positive correlation between sunshine and stock market returns for New York City over the period 1948-2010 after controlling for market anomalies and seasonal effects. The author concluded that this connection is slightly increasing over the past half century. Loughran and Schultz (2004) also found evidence of lower stock returns on the Nasdaq on cloudy days. The weather in the neighborhood of companies' headquarters was, however, unrelated to the returns on the stocks of the companies. However, the significance of the relationship is very much dependent on the period that is considered under the study. There are clear cyclical patterns visible in the weather effect. One possible explanation for the cyclical patterns is the emergence of non-rational investors in the stock market during certain periods in time - for instance for periods when investing in the stock market is popular. While less professional and, arguably, less rational investors enter the market, equity mispricing will occur more often (Akhtari, 2011). In order to check if the weather effect is present globally, Hirshleifer and Shumway (2003) conducted a study investigating the influence of cloud cover in the morning (when the market opens) on 26 international stock markets for the period 1982-1997. The authors also found a significant negative relationship between cloud coverage and equity returns. Almost 70% of the countries showed a negative coefficient of cloud coverage on returns. When controlling for the cloudiness, snow and rain were not significantly related to market returns. Nonetheless, the authors conclude that it is very difficult to use trading strategies based on the weather effect. This requires frequent trading that can only be profitable when transactions costs are low and benefits are larger than these costs. Cao and Wei (2005) investigated the link between temperature and the returns on nine stock indices around the world. The research observed a robust significant negative correlation between temperature and stock market returns for all globally dispersed countries. This relationship was stronger in winter than in summer. The impact of temperature on stock market returns was also more important than the influence of sunshine and the length of the night. Symeonidis, Daskalakis and Markellos (2011) focused on the influence of weather (cloudiness, temperature, precipitation and nighttime length) on the volatility of globally dispersed stock markets. In general, cloud coverage and the length of nighttime were significant and negatively related to stock market returns. However, the results proved to be depended on the location of focus. The aforementioned studies have a found significant relationship between weather and stock market returns or market volatility. However, these studies were focused on the United States or multiple countries at once. Floros (2011) found a negative connection between temperature and stock market returns for Portugal. Sriboonchitta, Chitip, Sriwichailampham and Chaiboonsri (2011) came to the same conclusion for the stock market in Thailand. Keef and Roush (2002) found only a small significant relationship between stock market returns and temperature in New Zealand and no significant relationship between cloud coverage and returns. On the other hand, wind had a strong significant influence. Dowling and Lucey (2005) concluded that rain, lunar phases, daylight time and seasonal fluctuations are all significant and negatively related to equity returns on the Irish stock market. They did not find support for the impact of cloud cover and humidity. Kaustia and Rantapuska (2011) supports the influence of lunar phases (positive), daylight (negative), precipitation (negative) and sunlight (positive) on the return and volume of the Finnish stock market, while no support was discovered for the seasonal affective disorder (SAD) and temperature. Chang, Nieh, Yang and Yang (2006) investigated the influence of temperature, humidity and cloud coverage on the stock market in Taiwan. The authors concluded that temperature and cloud coverage had the strongest negative effect on the stock returns. The findings in the paper of Shu (2008) partially support this result. This study found evidence for the argument that weather influences the mood of investors, which influences the behavior of investors and thus the stock prices. Better weather (here defined as low temperature, low humidity and high barometric pressure) leads to higher stock returns in Taiwan. Nonetheless, the relationship is stronger for individual investors than for institutional investors. Lee and Wang (2011) also found that cloud coverage had a strong negative significant impact on the Taiwanese stock market, especially in low cloud cover periods. Kang, Jiang, Lee and Yoon (2010) found strong results for the weather effect in Shanghai. The stock market in Shanghai allows trading of two distinct categories of stocks: A-shares and B-shares. A-shares are for domestic investors only and B-shares can be traded by foreign investors. The underlying idea of this study is that domestic investors are more affected by the weather (measured as temperature, humidity and sunshine) than foreign investors. The results show that over the whole period the weather effect is only significant for the A-shares; however, when the B-share market was opened for domestic investors the weather effect became also significant for B-shares. The same pattern applies for the volatility of the stock market. Yoon and Kang (2009) found mixed results for the Korean stock market. The influence of temperature, cloud cover and humidity has weakened over time because of the increased efficiency. In addition, the effect of ext
The effect of weather on stock returns: A comparison between emerging and developed markets
1
Abstract
3
Table of contents
5
1. Introduction
7
2. Literature review
8
2.1. Weather, mood and decision making behavior
9
2.2. Weather and the stock market
10
2.3. Two decades of weather effect literature: a lack of consensus
15
3. Data description
16
3.1. Data collection
16
3.2. Data analysis
19
4. Methodology and results
21
4.1. City-by-city tests
22
4.2. Joint tests
26
4.2.1. Pooled least squares regression
26
4.2.2. Binary regression
29
5. Robustness check
30
5.1. City-by-city tests
31
5.2. Joint tests
33
5.2.1 Pooled least squares regression
33
5.2.2. Binary regression
35
6. Potential explanations
36
7. Conclusion
40
8. References
42
9. Appendix
46
