Rain or Shine: Where is the Weather Effect?

Saunders (1993) and Hirshleifer and Shumway (2001) document the effect of weather on stock returns. The proposed explanation in both papers is that investor mood affects cognitive processes and trading decisions. In this paper, we use a database of individual investor accounts to examine the weather effects on traders. Our analysis of the trading activity in five major U.S. cities over a six-year period finds virtually no difference in individuals' propensity to buy or sell equities on cloudy days as opposed to sunny days. If the association between cloud cover and stock returns documented for New York and other world cities is indeed caused by investor mood swings, our findings suggest that researchers should focus on the attitudes of market-makers, news providers or other agents physically located in the city hosting the exchange. NYSE spreads widen on cloudy days. When we control for this, the significance of the weather effect is dramatically reduced. We interpret this as evidence that the behavior of market-makers, rather that individual investors, may be responsible for the relation between returns and weather.

[1]  Richard Roll,et al.  Orderimbalance, Liquidity and Market Returns , 2001 .

[2]  J. M. Pinegar.  Losing Sleep at the Market: Comment , 2002 .

[3]  Cesare Robotti,et al.  Playing the Field: Geomagnetic Storms and the Stock Market , 2003 .

[4]  Mark Grinblatt,et al.  Distance, Language, and Culture Bias: The Role of Investor Sophistication , 2000 .

[5]  Ilia D. Dichev,et al.  Lunar Cycle Effects in Stock Returns , 2001 .

[6]  David Easley,et al.  Is Information Risk a Determinant of Asset Returns , 2002 .

[7]  Mark Grinblatt,et al.  How Distance, Language, and Culture Influence Stockholdings and Trades , 2001 .

[8]  Zur Shapira,et al.  Patterns of Behavior of Professionally Managed and Independent Investors , 2000 .

[9]  Kathy Yuan,et al.  Are Investors Moonstruck? - Lunar Phases and Stock Returns , 2001 .

[10]  Tim Loughran,et al.  Weather, Stock Returns, and the Impact of Localized Trading Behavior , 2003, Journal of Financial and Quantitative Analysis.

[11]  Lisa A. Kramer,et al.  Winter Blues: A Sad Stock Market Cycle , 2003 .

[12]  Lisa A. Kramer,et al.  Losing Sleep at the Market: The Daylight Saving Anomaly: Reply , 2000 .

[13]  W. Jevons.  The Solar-Commercial Cycle , 1882, Nature.

[14]  Ning Zhu,et al.  The Local Bias of Individual Investors , 2002 .

[15]  D. Hirshleifer,et al.  Good Day Sunshine: Stock Returns and the Weather , 2001 .

[16]  Introduction to Weather Derivative Pricing , 2004 .

[17]  Tyler Shumway,et al.  Is Sound Just Noise? , 1998 .

[18]  Lisa A. Kramer,et al.  Losing Sleep at the Market: The Daylight-Savings Anomaly , 1999 .

[19]  Edward M. Saunders.  Stock Prices and Wall Street Weather , 1993 .

[20]  Tarun Chordia,et al.  Trading Activity and Expected Stock Returns , 2000 .

[21]  William N. Goetzmann,et al.  Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows , 2002 .

[22]  William N. Goetzmann,et al.  A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability , 2000 .

[23]  Charles M. C. Lee,et al.  Price Momentum and Trading Volume , 1998 .

[24]  Cesare Robotti,et al.  Playing the field: Geomagnetic storms and international stock markets , 2003 .