Stock Returns, weather, and air conditioning

Abstract

This study investigates the relationship between stock returns and local weather through a new channel—the influence of the air-cooling system installed in the New York Stock Exchange (NYSE). To our knowledge, we are the first to employ the use of air conditioning to examine whether and how weather, especially excessively high temperature, and other factors affect stock returns. Using data for 1885–1914, we show that lower Dow Jones Average (DJA) returns were significantly associated with hotness before the NYSE trading rooms were equipped with the cooling system in 1903, whereas this correlation is largely weakened afterward. We also find that before the introduction of the air-cooling system, the negative effect of high temperatures on stock returns was stronger when the precipitation was lower. We obtain consistent results when controlling for the calendar anomalies such as the May-to-October effect, the Monday effect, and the effect of macroeconomic conditions.

Air temperature and sovereign bond returns

“…Having scrutinized data from several major equity markets (Australia, Canada, Germany, Japan, Sweden, Taiwan, UK and the United States), Cao and Wei (2005a) find evidence that supports their theoretical conjectures: when the temperature is high (low), apathy dominates aggression (aggression dominates apathy); this, in turn, impedes (increases) risk-taking and results in lower (higher) stock returns. Other studies demonstrate a similar pattern within numerous developed and emerging stock markets around the world (Cao & Wei, 2005b;Chang et al, 2006;He & Ma, 2021;Hou et al, 2019;Sheikh et al, 2017;Yoon & Kang, 2009). Although several controversies emerged with concerns about the behavioral mechanism behind this phenomenon (see, e.g., Jacobsen & Marquering, 2008Kamstra et al, 2009), the overall conclusion appears unequivocal: A higher temperature coincides with lower stock returns (and vice versa).…”

Extreme heat and stock market activity

“…Our study contributes directly to this strand of literature by isolating the specific influence of excessively high temperatures on the financial decisions of market agents. Moreover, in contrast to prior studies that mainly examine the effect of weather conditions on returns and volatility (e.g., Hou et al, 2019), our analysis focuses on trading volume. We posit that trading volume is a more appropriate measure of investor activity.…”

The asymmetric effect of temperature, exchange rate, metals, and investor sentiments on solar stock price performance in China: evidence from QARDL approach

“…On the other hand, Yoon and Kang (2009) suggest that the weather anomaly starts fading with the improvement in market efficiency in the Korean stock market. Similarly, Hou et al (2019) argued that the weather effect on stock markets was largely mitigated with the introduction of cooling systems. Weagley (2019) presented a different view compared to the conventional behavioral perspective that extreme weather shocks increase demand for electricity leading to an upsurge in the firm's operational cost.…”

“…From the sales perspective, energy firms are largely affected by extreme temperatures compared to non-energy firms (Addoum et al 2020). Although advocates of behavioral finance argue that mispricing from weather anomalies corrects itself in the long run (Yoon and Kang 2009;Hou et al 2019), Bansal et al (2016 argued that temperature risk negatively influences the returns of global markets in the long run due to the significant social cost of carbon emissions associated with it. Assets of firms (such as solar energy firms) that are highly sensitive to carbon emissions and temperature are more exposed to temperature fluctuations in both the short and long run.…”