32 Pages Posted: 27 Aug 2002
Date Written: September 2002
Saunders (1993) and Hirshleifer and Shumway (2001) document the effect of weather on stock returns. The proposed explanation in both papers is that investor mood affects cognitive processes and trading decisions. In this paper, we use a database of individual investor accounts to examine the weather effects on traders. Our analysis of the trading activity in five major U.S. cities over a six-year period finds virtually no difference in individuals' propensity to buy or sell equities on cloudy days as opposed to sunny days. If the association between cloud cover and stock returns documented for New York and other world cities is indeed caused by investor mood swings, our findings suggest that researchers should focus on the attitudes of market-makers, news providers or other agents physically located in the city hosting the exchange. NYSE spreads widen on cloudy days. When we control for this, the significance of the weather effect is dramatically reduced. We interpret this as evidence that the behavior of market-makers, rather that individual investors, may be responsible for the relation between returns and weather.
Keywords: Weather Effect, Market Efficiency, Order Flow, Volatility, Individual Behavior
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Zhu, Ning and Goetzmann, William N., Rain or Shine: Where is the Weather Effect? (September 2002). Yale ICF Working Paper No. 02-27; EFA 2003 Annual Conference Paper No. 304. Available at SSRN: https://ssrn.com/abstract=322300 or http://dx.doi.org/10.2139/ssrn.322300