Does the weather affect stock market volatility?

Abstract

Abstract. This paper investigates the empirical association between stock market volatility and investor mood-proxies related to the weather (cloudiness, temperature and precipitation) and the environment (nighttime length). Overall, our results suggest that cloudiness and length of nighttime are inversely related to historical, implied and realized measures of volatility. The strength of association seems to vary with the location of an exchange on Earth with respect to the equator. Weather deviations from seasonal norms and dummies representing extreme weather conditions do not offer additional explanatory power in our datasets. JEL Classification: G14, G32Keywords: Stock market anomalies, Volatility, Sunshine effect, SAD effect, Behavioral Acknowledgements: We would like to thank Mark Kamstra, David Hirshleifer and an anonymous referee for providing us with valuable comments and suggestions which significantly improved the final version of the paper. We assume responsibility for any remaining errors.

Does the weather have impacts on returns and trading activities in order-driven stock markets? Evidence from China

“…Cunningham (1979) showed that in both summer and winter, a clear day will create a good mood, with temperature having a negative (positive) association with mood in the summer (winter). Schwarz and Clore (1983) suggested that people would gain more satisfaction from a bright day than a gloomy day, while Symeonidis et al (2010) noted that cloud cover has often been regarded as a natural factor influencing mood. Page et al (2007) found that in England and Wales, temperature has a negative correlation with mood in the summer months; when the temperature is above 18°C, an increase of one degree was found to be associated with a 3.8% rise in suicide rates.…”

Effects of Intraday Weather Changes on Asset Returns and Volatilities

“…A number of studies including those by Baker and Stein (2004), Brown (1999), and Wright and Bower (1992) point out that weather conditions can change the risk preference of investors, valuation of financial assets, and trading willingness; thus, they have a significant influence on market volatility. Chang et al (2008), Lu and Chou (2012), and Symeonidis et al (2010) provide empirical evidence to support the argument that the weather effect can be better captured by volatility than stock returns. However, relatively few extant studies pay attention to the volatility behavior.…”

“…They finally suggest that market makers' behavior, rather than that of individual investors, accounts for the relation between the weather and the stock returns. Symeonidis et al (2010) empirically test the association between the stock volatilities and investors' behavior by using the index returns from 26 international stock exchanges and weather-(cloud cover, temperature, and precipitation) and environment-related (the length of night time) variables as proxies for investors' mood. They find that the historical, implied, and realized return volatilities are inversely related to cloudiness and the length of night time, though the results can vary according to the exchange location.…”

Investor sentiment and stock returns: Wenchuan Earthquake

“…They attribute the differential reaction to widespread local media coverage of the disasters, which increases fear and anxiety among US investors and causes them to be more pessimistic about stock prices. Hirshleifer (2001), Baker and Wurgler (2006) and Symeonidis et al (2010) provide a review of the relevant literature.…”