Red sky at night or in the morning, to the equity market neither a delight nor a warning: the weather effect re-examined using intraday stock data

Abstract

Unlike most of the existing literature on the weather effect, we conducted our analysis by employing intraday weather and market data, examining a large set of stocks rather than indices only, including volume and volatility data in the study and inspecting a wide number of weather variables (temperature, humidity, pressure, visibility, wind, cloud, rain and snow). Our analysis covered the Italian stock market for the period August 2005–March 2014 for a total of 2201 trading days. We conclude that no systematic relationship seems to exist between the weather and the Italian stock market. Moreover, our results raise doubts that testing the weather effect by limiting the analysis to indices only can lead to spurious conclusions

Effects of Intraday Weather Changes on Asset Returns and Volatilities

“…Given that 11:00 and 15:00 are well after the market opening time and lunch break, respectively, the insignificant weather effect on returns during this interval (Table 7) appears to support the argument of Pizzutilo and Roncone (2016). Meanwhile, Zb.…”

“…Following Hirshleifer and Shumway (2003) and Pizzutilo and Roncone (2016), we also employ a logit regression model (Equation 3) in order to estimate the likelihood that unexpected weather factors would lead to positive stock returns.…”

“…Pizzutilo and Roncone (2016) conjecture that if the weather conditions can influence investor behavior or their risk preference, the magnitude of these effects on the stock market would vary according to the time of the day. For example, humans are more susceptible to weather conditions at the beginning of the working day than towards its end, and the mood of a person can vary owing to many other factors and the new market information received.…”

“…Lu and Chou (2012) provide an intraday analysis of trading activities and stock index returns on a pure order-driven market, such as the Shanghai Stock Exchange of China, and find that mood changes in response to weather conditions tend to reduce market turnover and liquidity but have little impact on stock index returns. More recently, Pizzutilo and Roncone (2016) conduct an intraday analysis using a large set of stocks listed on the Italian stock exchange and show there is little evidence to support the systematic relationship between weather-related variables and stock market behavior. They further suggest that weather effect analysis using stock indices tends to be entirely data-driven and leads to spurious results.…”

Light a lamp and look at the stock market

“…If the light-a-lamp event generates positive emotions and good mood among the investors, then we expect to observe a positive stock market response in the post-event days. On the contrary, the positive relationship between people's mood and stock returns cannot be generalized globally (Pizzutilo and Roncone 2017). If the stock market behaves efficiently in accordance with economic fundamentals, then the event has an insignificant effect on the returns (see, Fama 1970;Fama and French 2015).…”