'Is it the Weather?'

Abstract

We show that results in the recent strand of the literature that 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, 2004) 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. 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. However, we also show that at best, these two studies offer two of many possible explanations for the observed seasonal effect. As an illustration we link ice cream production and airline travel to the stock market seasonality using similar reasoning. Our results suggest that without any further evidence the correlation between weather variables and stock returns might be spurious and the conclusion that weather affects stock returns through mood changes of investors is premature.

Keywords: stock market seasonality, sell in May, seasonal affective disorder, temperature, spurious correlations

JEL Classification: M, G3, G11, G14