The Temperature Effect and Sovereign Bond Returns

41 Pages Posted: 28 Dec 2021

See all articles by Renatas Kizys

Renatas Kizys

University of Southampton, Southampton Business School, Department of Banking and Finance

Wael Rouatbi

Montpellier Business School

Zaghum Umar

Zayed University - College of Business; Netspar

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business; University of Cape Town

Date Written: December 28, 2021

Abstract

The relationship between air temperature and sovereign bond returns is founded on competing paradigms: macroeconomic, behavioral, and energy demand-based. Which of these theoretical mechanisms receives support from data? To answer this, we examine four decades of bond data from 31 countries. Generally speaking, daily temperature positively affects government bond returns. A 10°F rise leads to an increase in sovereign bond returns between 0.22 and 0.85 basis points. We also document evidence of asym-metric and nonlinear price responses to both temperature levels and shocks. Our results support the macroeconomic and behavioral paradigms, albeit not the energy demand-based view. Our findings survive a battery of robustness checks.

Keywords: air temperature, sovereign bond returns, international government bond markets, mac-roeconomic channels, behavioral paradigm, energy demand-based view, asset pricing anomalies, risk aversion, seasonal affective disorder

JEL Classification: G10, G12, G14, G15

Suggested Citation

Kizys, Renatas and Rouatbi, Wael and Umar, Zaghum and Zaremba, Adam, The Temperature Effect and Sovereign Bond Returns (December 28, 2021). Available at SSRN: https://ssrn.com/abstract=3995466 or http://dx.doi.org/10.2139/ssrn.3995466

Renatas Kizys

University of Southampton, Southampton Business School, Department of Banking and Finance ( email )

Room 1013, Building 4
Highfield Campus
Southampton, SO17 1BJ
United Kingdom
+442380598612 (Phone)

HOME PAGE: http://https://www.southampton.ac.uk/business-school/about/staff/rk1y18.page

Wael Rouatbi

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Zaghum Umar

Zayed University - College of Business ( email )

P.O. Box 4783
Abu Dhabi
United Arab Emirates

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

HOME PAGE: http://sites.google.com/view/adamzaremba

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

University of Cape Town

Cape Town
South Africa

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