Are Weather-Based Trading Strategies Profitable?
39 Pages Posted: 6 Feb 2018
Date Written: January 27, 2018
We estimate the profitability of global index-level trading strategies formed on daily weather across 49 countries. We use ex ante weather information combined with the statistical relationship between daily weather and country index returns to predict index returns on each day. We then form a long-short hedge strategy and a long-only strategy, and find that both strategies generate substantially out-of-sample gross profits. The long-only strategy produces more consistent annualized profits of up to 20.5%, as opposed to a mean world index return of 3.75% during 1993-2012. These findings help solidify the claim that weather exerts economically important impact on mood, and investors can trade profitably on daily weather.
Keywords: weather, stock returns, trading strategy, temperature region, time zone, investor psychology
JEL Classification: G02, G11, G14, F39
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