Working Paper: NBER ID: w9465
Authors: William N. Goetzmann; Ning Zhu
Abstract: 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 vistually 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 than individual investors, may be responsible for the relation between returns and weather.
Keywords: No keywords provided
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Weather conditions (Q54) | Stock trading behavior (G41) |
| Cloudy days (Q54) | Stock returns (G12) |
| Bid-ask spread widening (G19) | Stock returns (G12) |
| Weather conditions (Q54) | Bid-ask spread (D44) |
| Market makers' behavior (D53) | Weather effect on stock returns (G17) |
| Local weather conditions (Q54) | Individual investor trading decisions (G11) |