Reassessment of the Weather Effec t: Stock Prices and Wall Street Weather

Abstract

Psychology literature has long established the effect of sunshine on mood. Re-cent research in behavioral finance has investigated whether investors ’ mood fluctuations induced by hours of sunshine affect investment decisions in a sig-nificant manner such that equity mispricing follows. Some research in this area has concluded that there is a systematic relationship between security markets and local weather, while other research has found no relationship between in-vestment decisions and hours of sunshine. This paper aims to study the weath-er effect and its possible evolution over time in an effort to consolidate the different findings in the field. Sunshine and daily market return are positively correlated for New York City from 1948 to 2010. However, this relationship exhibits a distinct cyclical pattern over the last 50 years. One possible explana-tion for the existence of such a pattern is the entry of ‘non-rational ’ investors into the market during certain periods which results in the identification of a significant weather effect. This finding supports the view that security markets are to some extent irrational.