Can You Feel the Heat? Extreme Temperatures, Stock Returns, and Economic Sentiment

37 Pages Posted: 5 Jan 2018 Last revised: 16 Nov 2019

See all articles by Christos Makridis

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: December 26, 2018

Abstract

Can fluctuations in climate affect economic activity by altering beliefs about the economy? Using new data on subjective well-being and economic sentiment, this paper documents a causal effect of extreme temperatures (below 15 and above 85 degrees Fahrenheit) on beliefs about current and future national economic growth. The identification strategy exploits the exposure of observationally equivalent individuals to daily fluctuations in county temperature between 2008 and 2016. These effects are concentrated among higher skilled individuals who face greater cognitive demands in their job. Moreover, these effects on sentiment propagate into asset prices. In particular, temperature also affects the marginal investor by reducing stock returns on days that are very cold or very hot. These results suggest that increased climate variability could raise the amount of non-fundamental risk in the market.

Keywords: beliefs, climate, sentiment, temperature

JEL Classification: D84, D91, Q50, Q54

Suggested Citation

Makridis, Christos, Can You Feel the Heat? Extreme Temperatures, Stock Returns, and Economic Sentiment (December 26, 2018). Available at SSRN: https://ssrn.com/abstract=3095422 or http://dx.doi.org/10.2139/ssrn.3095422

Christos Makridis (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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