Extreme Local Temperatures Lower Expressed Sentiment About U.S. Economic Conditions With Implications For The Stock Returns Of Local Firms

Journal of Behavioral and Experimental Finance

39 Pages Posted: 5 Jan 2018 Last revised: 7 Jul 2022

See all articles by Christos Makridis

Christos Makridis

Stanford University; Institute for the Future (IFF), Department of Digital Innovation, School of Business, University of Nicosia; Arizona State University (ASU); Department of Veterans Affairs (VA)

Jason D. Schloetzer

Georgetown University - Department of Accounting and Business Law

Date Written: June 29, 2022

Abstract

We draw from research that finds local weather conditions affect individuals' belief-formation process and asset prices to investigate whether "extreme" local temperatures impact individuals' beliefs about U.S. economic conditions (i.e., economic sentiment) and the stock returns of local firms. We combine Gallup's U.S. Daily Poll, which provides the daily-level economic sentiment of a population-representative random sample of 1.5 million individuals, with daily weather conditions based on survey respondent location. We document that extreme local temperatures decrease individuals' sentiment about the U.S. economy and that this decrease relates to declines in the stock returns of local firms. Further tests distinguish this extreme local temperature-sentiment effect from the effect of perceived life satisfaction on individuals' economic sentiment, suggesting that the potential effect of extreme temperatures on individuals' moods is not driving our results. We conclude that extreme local temperatures affect individuals' sentiment about economic activity beyond the potential effect of temperature on firm- or local-level economic variables, with implications for stock returns.

Keywords: Economic sentiment, Capital markets, Asset prices, Limited attention, Investor psychology, Climate

JEL Classification: G12, G14, G41, M41, D91, Q54

Suggested Citation

Makridis, Christos and Schloetzer, Jason D., Extreme Local Temperatures Lower Expressed Sentiment About U.S. Economic Conditions With Implications For The Stock Returns Of Local Firms (June 29, 2022). Journal of Behavioral and Experimental Finance, Available at SSRN: https://ssrn.com/abstract=3095422 or http://dx.doi.org/10.2139/ssrn.3095422

Christos Makridis (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Institute for the Future (IFF), Department of Digital Innovation, School of Business, University of Nicosia ( email )

Nicosia, 2417
Cyprus

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Department of Veterans Affairs (VA) ( email )

810 Vermont Avenue NW
Washington, DC 20420
United States

Jason D. Schloetzer

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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