Rain or Shine: Where is the Weather Effect?
China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
NBER Working Paper No. w9465
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 vistually 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 than individual investors, may be responsible for the relation between returns and weather.
Number of Pages in PDF File: 31working papers series
Date posted: February 2, 2003
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