JEL classification

۱٫ Introduction

۲٫ Related literature

۳٫ Sample and summary statistics

۴٫ Methodology

۵٫ Empirical results

۶٫ Discussion

۷٫ Conclusions

Appendix. Supplementary materials

References

Abstract

Since Saunders (1993), there has been ongoing research on whether the weather can affect asset prices. Our study of the impact of weather on stock and foreign exchange (henceforth FX) markets shows that the weather has no effect during 2002–۲۰۱۸, suggesting that any effect may have dissipated after discovery as practitioners have tried to use investment vehicles to exploit it. The results indicate that mood changes caused by the weather do not significantly affect FX and stock returns.

Introduction

Behavioral finance holds that security market prices are determined not only by their intrinsic values but also by investor psychology. Weather can affect investors’ moods and thus their behavior in financial markets. For example, investors may be in a good (bad) mood when it is sunny (during thunderstorms), so they (do not) buy stocks (Daniel et al., 1998).

If the weather affects investor mood, resulting in stock price fluctuations, could the weather also affect the FX market? The exchange rate is affected by many factors, like inflation and interest rates. In the short term, it may be affected by events like Brexit. Will FX participants be affected by the weather in their trading decisions?

We investigate whether the weather affects FX markets. We select nine currencies: US Dollar (USD), Japanese Yen (JPY), Euro (EUR), Pound (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), Swiss Franc (CHF), New Zealand Dollar (NZD) and Swedish Krona (SEK), respectively. We include eight currency pairs in our study, pairing the various currencies against USD and GBP, respectively. To compare the effects of the weather on the FX and stock markets, we also review US and UK stock indices. We find insufficient evidence that the weather can affect the stock and FX markets in the US and the UK. Although the weather can affect a person’s mood, this does not mean that it can affect asset prices.

The next section reviews the relevant literature. Section 3 describes the weather and return data for the FX and stock markets. Section 4 details the methodology. Section 5 offers the results and Section 6 discusses their implications. The final section concludes.