Stock Market Returns and Weather Anomaly: Evidence from an Emerging Economy

Abstract

Financial economists believe that the arbitrage forces in the market are the main reason of market efficiency and these forces are the fundamental concept of efficient market hypothesis (EMH). During last few years, various theoretical and empirical evidences have been presented to support the work of financial modeling for the markets with less than rational investors whose trading strategies are based on psychological factors like mood and emotions. Weather condition is among the substantial factors affecting investors' mood and emotions. Present study investigates the impact of temperature on stock market returns in emerging economy of Pakistan. Using the daily temperature records and stock market indices of Karachi and Islamabad, the study has employed auto regressive (AR)-generalized autoregressive conditional heteroscedasticity (GARCH) model from 2006 to 2010. Based on AR (1)-GARCH (1, 1) estimation the study has found that weather temperatures of both Karachi and Islamabad are negatively related with Karachi Stock Exchange (KSE) and Islamabad Stock Exchange (ISE) index returns, respectively.

Testing for temperature anomaly in capital markets of Pakistan and India

“…Similar findings later strengthen the theory in the study of Pilcher et al (2002). Hence, like earlier studies (i.e., Mirza et al 2012), we used the daily average temperature data as a proxy to analyse the temperature anomaly and its impact on daily stock returns in the capital markets of Pakistan and India.…”

“…Extreme high temperature can result in either higher or lower returns since aggression and apathy are expected psychological outcomes but the net effect on investor risk taking depends on the tradeoff between the two. Floros (2008) and Mirza et al (2012) also found a significant negative relationship between temperature and stock returns. Although, the impact is unobservable in the daily routine, but estimated results based on sophisticated time series analysis shows a statistically significant temperature impact on stock returns for Pakistani capital market.…”

“…Extreme temperatures (high or low) can lead a human to aggression or apathy (Cao and Wei, 2005). Floros (2008), Mirza et al (2012) and Pilcher et al (2002) also found a significant relationship between temperature variable and stock returns. So far the existing literature has mainly focused on weather effect on stocks return in western and European countries and a limited research has been carried out on South Asian countries.…”

Weather Effects on Stock Returns and Volatility in South Asian Markets

“…However, they use one model for all the markets assuming the generalized error distribution (GED) which may not be the case for every market. Mirza et al (2012) investigate the two Pakistani markets and find that temperature is negatively related to index returns. However, they used raw temperature data only.…”

Stock Returns and The Weather Effect: the Case of Ghana

“…This gives investors an idea on how to trade in Taiwan stock market (Chang et al, 2006). Mirza et al similar study on two Pakistani stock markets, which illustration a adverse linkage amongst returns and temperature (Mirza et al, 2012). Wang (2011) concluded that knowledge, experience, and income are vital elements that sway younger generations' investing behaviors in mutual funds (Wang, 2011).…”