Is it the Weather?

Abstract

We show that results in the recent strand of the literature, which tries to explain stock returns by weather induced mood shifts of investors, might be data-driven inference. More specifically, we consider two recent studies (Kamstra, Kramer and Levi, 2003a and Cao and Wei, 2005) that claim that a seasonal anomaly in stock returns is caused by mood changes of investors due to lack of daylight and temperature variations, respectively. While we confirm earlier results in the literature that there is indeed a strong seasonal effect in stock returns in many countries: stock market returns tend to be significantly lower during summer and fall months than during winter and spring months as documented by Bouman and Jacobsen (2002), there is little evidence in favor of a SAD or temperature explanation. In fact, we find that a simple winter/summer dummy best describes this seasonality. Our results suggest that without any further evidence the correlation between weather-related variables and stock returns might be spurious and the conclusion that weather affects stock returns through mood changes of investors is premature.

Important Note: Results in this version deviate slightly from the Journal of Banking version as part of the dataset in that version was incorrect. Although results are qualitatively similar this version contains estimates and tables recalculated based on the proper dataset.

Keywords: Stock market seasonality, Sell in May, Seasonal Affective Disorder, temperature, spurious correlations

JEL Classification: G10, G12