Does the sun skew your judgment? a hidden influence on the stock market – Climate – effects of sunshine on stock-market performance – Brief Article
RATHER THAN MAKING ANOTHER INTERest rate cut, perhaps the Fed can breathe life into the economy by moving Wall Street to Ft. Lauderdale. According to a study to be published in an upcoming issue of the Journal of Finance, sunshine boosts the bottom line as well as the spirits.
David Hirshleifer, Ph.D., of the Ohio State University’s Fisher College of Business, and study coauthor Tyler Shumway, Ph.D., assistant professor of finance at the University of Michigan, found that when the sun shone on 26 leading global stock exchanges over a period of 15 years, market returns shot up.
“Sunshine is strongly positively correlated with daily stock returns,” says Hirshleifer, who revealed that unseasonably sunny days in otherwise overcast seasons add up to an annualized excess return of 24.8 percent. In other words, stocks traded on sunny days yielded nearly 25 percent more money than those traded during cloudy periods. If transaction costs are assumed to be minor, it is possible to trade profitably on the weather.
It may sound implausible, but the finding is in line with what many psychologists already know about the effect of sun on mood. Namely, sunshine makes people feel happy, and when they’re happy, they view situations more optimistically. This means they’re less likely to scrutinize an investment that they might cast aside when feeling grumpy.
“We were interested in the idea that mood might affect stock prices,” Hirshleifer says. “We already knew euphoria and panic have big effects on stock prices. This study suggests that there are many irrational factors affecting the stock market.”
This is one reason Hirshleifer warns investors against cashing in on sun-induced contentment.
“Our main message is not about a possible trading strategy to make money,” he says. “But a caution to be careful about one’s own mood. Our evidence indicates that moods affect trading in irrational ways. So if you feel good about an investment, you need to ask yourself, `Is it the stocks, or am I really just in a good mood right now?'”
COPYRIGHT 2001 Sussex Publishers, Inc.
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