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Is it the weather?

  • Jacobsen, Ben
  • Marquering, Wessel
Registered author(s):

    We show that results in the recent strand of the literature, which tries to explain stock returns by weather induced mood shifts of investors, might be data-driven inference. More specifically, we consider two recent studies [Kamstra, Mark J., Kramer, Lisa A., Levi, Maurice D., 2003a. Winter blues: A SAD stock market cycle. American Economic Review 93(1), 324-343; Cao, Melanie, Wei, Jason, 2005. Stock market returns: A note on temperature anomaly. Journal of Banking and Finance 29(6), 1559-1573] that claim that a seasonal anomaly in stock returns is caused by mood changes of investors due to lack of daylight and temperature variations, respectively. While we confirm earlier results in the literature that there is indeed a strong seasonal effect in stock returns in many countries: stock market returns tend to be significantly lower during summer and fall months than during winter and spring months as documented by Bouman and Jacobsen [Bouman, Sven, Jacobsen, Ben, 2002. The Halloween indicator, Sell in May and go away: Another puzzle. American Economic Review, 92(5), 1618-1635], there is little evidence in favor of a SAD or temperature explanation. In fact, we find that a simple winter/summer dummy best describes this seasonality. Our results suggest that without any further evidence the correlation between weather-related variables and stock returns might be spurious and the conclusion that weather affects stock returns through mood changes of investors is premature.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 4 (April)
    Pages: 526-540

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:4:p:526-540
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    1. Kamstra, M.J. & Kramer, L.A. & Levi, M.D., 1998. "Losing Sleep at the Market: The Daylight-Savings Anomaly," Discussion Papers dp98-04, Department of Economics, Simon Fraser University.
    2. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-93, May.
    3. Kelly, Patrick J. & Meschke, Felix, 2010. "Sentiment and stock returns: The SAD anomaly revisited," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1308-1326, June.
    4. William N. Goetzmann & Ning Zhu, 2003. "Rain or Shine: Where is the Weather Effect?," NBER Working Papers 9465, National Bureau of Economic Research, Inc.
    5. Garrett, Ian & Kamstra, Mark J. & Kramer, Lisa A., 2005. "Winter blues and time variation in the price of risk," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 291-316, March.
    6. Angel Pardo & Enric Valor, 2003. "Spanish Stock Returns: Where is the Weather Effect?," European Financial Management, European Financial Management Association, vol. 9(1), pages 117-126.
    7. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
    8. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, 06.
    9. Erik Theissen, 2007. "An analysis of private investors' stock market return forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 17(1), pages 35-43.
    10. Driesprong, Gerben & Jacobsen, Ben & Maat, Benjamin, 2008. "Striking oil: Another puzzle?," Journal of Financial Economics, Elsevier, vol. 89(2), pages 307-327, August.
    11. Mark J. Kamstra & Lisa A. Kramer & Maurice D. Levi, 2003. "Winter Blues: A SAD Stock Market Cycle," American Economic Review, American Economic Association, vol. 93(1), pages 324-343, March.
    12. Sven Bouman & Ben Jacobsen, 2002. "The Halloween Indicator, "Sell in May and Go Away": Another Puzzle," American Economic Review, American Economic Association, vol. 92(5), pages 1618-1635, December.
    13. Cao, Melanie & Wei, Jason, 2005. "Stock market returns: A note on temperature anomaly," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1559-1573, June.
    14. Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-45, December.
    15. Elena Andreou & Rita Desiano & Marianne Sensier, 2001. "The behaviour of stock returns and interest rates over the business cycle in the US and UK," Applied Economics Letters, Taylor & Francis Journals, vol. 8(4), pages 233-238.
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