The Role of Weather Anomalies in Shaping Investor Sentiment and Stock Market Performance: A Conceptual Analysis

This conceptual paper presents a theoretical explanation for understanding the impact of weather anomaly on stock market dynamics and investor behavior. Weather anomalies, including unusual temperature variations, extreme precipitation, humidity, cloudiness, sunshine, wind speed, and severe weather events, can disrupt investors mood, emotions, feelings, and behavior, which are subsequently reflected in share market returns. Current paper starts with an ample review of prevailing literature on the impact of various weather-related factors upon investor behavior as well as equity markets, highlighting significant findings and methodological approaches while identifying gaps and inconsistencies. It then presents an enhanced conceptual rationalization that incorporates psychological and behavioral finance perspectives, providing a significant view of how investor sentiment and market reactions to weather anomalies may lead to abnormal returns. This framework challenges the assumption of strong market efficiency by suggesting that systematic and seasonal patterns in investor behavior, influenced by emotions, cognitive biases, and weather factors, can amplify the financial impacts of weather anomalies on equity markets. The paper also explores the practical implications of weather anomaly for investment strategies, risk management, and market regulation, accenting the necessity for adaptive tactics in optimal portfolio management. Finally, it outlines routes for upcoming research, advocating for empirical studies and investigate the underlying causes of weather anomalies. This paper aims to enhance the understanding of weather anomalies’ role in financial markets and contribute to the broader discourse on market efficiency and environmental finance. The findings are particularly relevant for investors, mutual funds, brokers, practitioners, policymakers, and regulators.