Relationship among weather effects, investors' moods and stock market risk: An analysis of bull and bear markets in Taiwan, Japan and Hong Kong

Yi-Hsien Wang, Kuang-Hsun Shih, Je-Wei Jang
2018 Panoeconomicus  
Literature shows that weather encourages people to engage in certain behaviors and that three factors, particularly sunshine, temperature, and humidity, have the greatest psychological impact on investors (Edgar Howarth and Michael S. Hoffman 1984) . On the contrary, some results indicate that the weather has insignificant effect on investors (Ben Jacobsen and Wessel Marquering 2008; Jing Lu and Robin K. Chou 2012). Hence, our research used three weather variables, namely temperature, humidity,
more » ... and cloud cover, to detect the effects of extreme weather conditions on stock returns. The sample data used in this study consisted of the intraday data, with thirty minutes stock price, of Taiwan, Japan, and Hong Kong from 2012 to 2015. By taking into consideration the effects of asymmetric volatility, we employed the GJR-GARCH model to capture stock market returns. In addition, as the volatility of the stock market is affected by a number of economic factors, this study included the market situation, whether a bear or bull market type, as an additional condition to explore whether market condition renders the weather effects more significant. The results of this research support relevant literatures and can be used as a reference for investors. empirical studies have suggested the existence of an unusual phenomenon that cannot be explained by traditional finance theory. For example, Rajnish Mehra and Edward C. Prescott (1985) found that there is a 6% gap between the rate of return of the S&P500 and risk-free interest rates. Daniel Kahneman, Jack L. Knetsch, and Richard Thaler (1986) suggested that people are concerned about the phenomena that the traditional finance theory is unable to explain, and it includes changes in nominal wages rather than actual wages and the Monday and January effects. The motivation of this study is not only influenced by the traditional financial theory but also the emotional reactions affecting the stock market behavior. Based on the above analysis, this study aims to utilize stock return volatility to investigate the influence of weather effects on various market situations to explore the dynamic relationship between stock market reaction and weather effects in various market situations in Taiwan, Japan, and Hong Kong.
doi:10.2298/pan150927029w fatcat:6qhillszzzbwvmihexotkxy5mm