Good Day Sunshine: Stock Returns and the Weather

Abstract

Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relationship between morning sunshine in the city of a country's leading stock exchange and daily market index returns across 26 countries from 1982 to 1997. Sunshine is strongly signi¢cantly correlated with stock returns. After controlling for sunshine, rain and snow are unrelated to returns. Substantial use of weatherbased strategies was optimal for a trader with very low transactions costs. However, because these strategies involve frequent trades, fairly modest costs eliminate the gains.These ¢ndings are di⁄cult to reconcile with fully rational price setting. SUNSHINE AFFECTS MOOD, as evidenced by song and verse, daily experience, and formal psychological studies. But does sunlight a¡ect the stock market?The traditional e⁄cient markets view says no, with minor quali¢cations. If sunlight a¡ects the weather, it can a¡ect agricultural and perhaps other weatherrelated ¢rms. But in modern economies in which agriculture plays a modest role, it seems unlikely that whether it is cloudy outside the stock exchange today should a¡ect the rational price of the nation's stock market index. (Even in countries where agriculture plays a large role, it is not clear that one day of sunshine versus cloud cover at the stock exchange should be very informative about harvest yield.)An alternative view is that sunlight a¡ects mood, and that people tend to evaluate future prospects more optimistically when they are in a good mood than when they are in a bad mood. A literature in psychology has found that mood a¡ects judgment and behavior. The psychological literature on sunlight, mood, and misattribution of mood is discussed in the next section. An important strand of this literature has provided evidence that mood contains valuable information

Predicting short-term stock fluctuations by using processing fluency

“…Researchers have recently begun to consider the inf luence of incidental variables on stock market investment. Consistent with the finding that people are more optimistic when in a good mood (8), markets are more likely to appreciate on sunny rather than rainy days (9,10). Similarly, behavioral finance researchers have found a so-called ''home bias,'' in which people prefer to invest in local as opposed to international markets (11).…”

Effects of Intraday Weather Changes on Asset Returns and Volatilities

“…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.…”

“…His results also show that the positive sunlight effect on stock returns is robust to other market anomalies related to the month (January), weekend, and small-firm effects. Hirshleifer and Shumway (2003) extend the work of Saunders (1993) to conduct a systematic analysis on the correlation between the measures of cloud cover for 26 of the world's major cities and the daily returns of the corresponding stock market index, which includes emerging stock markets. They document a statistically significant negative relationship between cloudiness and stock index returns, and these results are neither market-or city-specific.…”

“…It commonly uses weather-related variables as psychosocial proxies, since the weather effect is recognized as being associated with well-known market anomalies. Unlike other anomalies that have rational and behavioral explanations, weather conditions only refer to the psychological grounds that are involved in stock market decision making (Hirshleifer and Shumway, 2003). In addition, weather-related variables are readily measured exogenous factors.…”

“…Saunders (1993) analyzes the correlation between the weather conditions of New York City and daily return changes in the NYSE/AMEX index, and finds that weather conditions have a significant impact on the changes in stock prices when used as proxies for investor sentiments. Following the seminal work of Saunders (1993), many studies, including those by Cao and Wei (2005), Hirshleifer and Shumway (2003), and Kamstra et al (2003), support Saunders's (1993) view, while others find little evidence of the weather effect on stock returns suggested by Saunders (Krämer and Runde, 1997;Trombley, 1997). More recently, researchers have been investigating Second, we document the volatility behavior as well as the stock returns in response to the weather effect.…”