Impact Of Temperature Humidity Cloud Cover On Stock Returns

Topics: Statistical significance, Statistical hypothesis testing, Statistics Pages: 22 (6099 words) Published: February 12, 2015


Impact of Temperature, Humidity and Sunshine on Stock Returns In this paper, using two models, I test if there is something like the weather effect on the daily returns of NYSE. I used temperature, humidity and cloud cover (a measure of sunshine) as the factors explaining the weather effect. In the first model, I found that temperature is statistically significant to the daily returns. Whereas, when I held control for various seasonal anomalies such as January effect, and precipitation I found no statistical significance in the explanatory variables. In the second model, months such as May, June, August and November were statistically significant to the daily returns.

Akash Bhatnagar
Analysis of Financial Institutions and Markets
Prof. Robert D. Pritchard
12/02/2014
Introduction
Weather is defined as “the state of the atmosphere at a place and time as regards heat, dryness, sunshine, wind, rain, etc” (Merriam Webster). There are many people who wake up every day and check the weather. But what significance does that really have in one’s life. From my experience, I could correlate how hot or cold it is to what I will do throughout the day, what I need to keep in my backpack and how I will feel in the morning. Imagine that shares of company X are not doing well at the moment. Now what would you think if a trader at Wall Street says “It is warm, sunny and not humid today, so I will buy shares worth of $100 of Company X?” You would think, the trader does not know what he is talking about. But did you know, that trader could have some merits in what he/she said. That is the scope of this research. Through this research, I will correlate how several indicators of weather affect the stock returns. But the real question is does the weather really affect stock prices? There are a lot of previous researches to explore if the behavioral factors affect the decision of traders. Some researchers have used weather, international soccer games, twitter to show the relation between one’s mood and the stock prices in a particular country. How hot or cold it is could certainly affect the mood of a human being. The outlook of this research is to test if a stock is solely dependent on the economic factors or the behavior which could change because of the humidity level also play a part in stock prices. The research is also important because as a trader, while valuing stocks, I would need to understand behavioral aspects as well to reach the right valuation. It is crucial to know that there are certain behavioral aspects that everybody needs to take into account before valuing a particular stock. An investors psyche usually affects the price of a stock because of several factors such as weather, over reaction to a particular news etc. Hence as a trader, I would always have to account for such psychological anomalies during a valuation and/or outlook of a stock. The way traders think and feel affect their decision on whether to buy or sell a stock. The factors that affect that decision play a huge role on how a company shares perform. The temperature, humidity and hours of sunlight throughout the day could be a few of the psychological factors that affect the behavior of a trader. Previous researchers have created a relation between weather and stock performances in cities that have a stock exchange because of the active presence of traders in the city. The previous methods enforces an assumption that the presence of traders is vital in the location one is trying to examine. That is the reason the chosen location always has a stock exchange.

For this reason, I have decided to analyze New York. I will collect the daily mean temperature, mean humidity and cloud cover which is measure on a scale from 0-8. I have collected the data from January 1st, 2010 to December 31st, 2013. I will also collect the daily returns of NYSE Composite Index during the same period. Through this time period I hope to create the same...

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