Global Weather-Based Trading Strategies
49 Pages Posted: 6 Feb 2018 Last revised: 20 May 2020
Date Written: May 19, 2020
We estimate the profitability of global index-level trading strategies formed on daily weather conditions across 49 countries. We use pre-market weather conditions (sunshine, wind, rain, snow, and temperature) and the statistical relationship between weather and returns to predict index returns each day. In the out-of-sample test for our 1993-2012 sample, a global weather-based hedge strategy produces a mean annual return of 15.2% compared to a mean world index return of 3.1%, corresponding to a Sharpe ratio of 0.462 relative to 0.005 for the world index. Our findings confirm that multiple weather conditions exert economically important impacts on stock returns around the globe.
Keywords: weather, stock returns, trading strategy, temperature region, time zone, investor psychology
JEL Classification: G02, G11, G14, F39
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