Trend Trading - How Weather Can Affect The Financial Markets?

It has been long known that sunshine, or the lack of it, influences mood and mood can shape behavior. Is it then plausible to say that weather can affect the markets? After all financial markets are often seen as an integral of economic mood and market sentiment. For years, researchers in finance have applied psychological studies in search for behavioral influence on market prices. The research papers of Saunders, Hirshleifer and Shumway, and Kramer and Runde, are to name a few documented works in studying this strange and mysterious relationship between weather and financial markets. In fact their works appear to be one of the most direct evidences to date that stock trade review prices are not rational reflection of value only, but are instead strongly influenced by investors’ emotional states. In this article, we try to encapsulate the derived general inference on how weather changes can affect the financial markets. rnThe state of atmosphere at a place and time as regards to usual climatic measures, such as heat, cloudiness, humidity, sunshine, wind and rain, can create a pleasing or displeasing response from the people of that region. This response is majorly reflected in their emotions and moods, which in turn is reflected in their behavior. Below I have listed few key pointers of such behavioral theories: 1. People who are in good moods are believed to make more optimistic choices and judgments than people in bad moods. 2. Bad mood may tend to stimulate people to engage in detailed analytical activity, whereas good moods are oft-associated with efficient fact-finding andless critical modes of information processing. rn3. Investors’ subjective parameters, such as level of risk aversion, judgment of factors, etc fluctuate over time due to change in mood 4. People in good moods are more receptive to weak as well as strong arguments. rnIt’s true that this list of theories can continue forever, however, the point here is to give you an idea of how mood can effect investors’ behavior. An important part of many theories of affective states is that such states provide information, perhaps unconsciously, to individual about environment. In the most basic terms, many researchers categorically asserted that a sunny day in the region where the stock market coaching is situated, typically constitutes a positive investor mood and higher market returns can be expected. They also found evidence that stocks returns were lower on cloudy days. rnBased on the above discussion, it must be noted that weather can create fluctuations in mood.and in the process, influences the decision-making of investors. As a result, we observe the effects in the equilibrium of market prices. However, anything in line with the mass-expectation will not generate significant behavioral change. A limitation to most of these studies is that the weather at the stock exchange is often not the same as the weather experienced by the investors who are submitting orders to the exchange. Therefore, unless the situation deals with some oddity orextremes, it is less likely that the market behavior can be attributed to weather-response analysis. For instance, a warm day in winter would be unexpected butwould begreatly welcomed by most – thereby, can bring about a sudden positivity to investor mood. On the other hand, a mild storm day in the same season will not create any effect, as it is normally expected. rnUnequivocally, extreme or erratic weather conditions contribute to changes in financial market in more ways than investor mood or behavior. This usually involves a drastic occurrence where one or more companies, or a significantly important region has been affected by the sudden climatic changes. There are five such potential global climate shocks, as pointed out by Lawrence J. Oxley in his recent book, viz.: 1. Excess snow and icern2. Floodingminesrn3. Farmland droughts, floods, and frostrn4. Hurricanes and tornadoesrn5. Timberland fires Surely enough, these do not require much of an explanation, as any company, directly or indirectly, exposed to these acts of nature would observe some dramatic price action. rnTo conclude, there are numerous studies in psychology that have established people’s mood and judgments are affected by exposure to sunlight. The researchers in finance have exploited such findings. The derived theories prove that sunshine, clouds, rain, etc. are significantly correlated with daily stock returns. Further, extremity of weather (such as a natural calamity) can take markets by surprise, in which case any related sector or industry may experience strong price actions, not to mention the increasing demand of safe-haven during the period. This would signifyincrease in investor fear as it depends on actual loss thanmere sentiment buildup. For that reason, the geographical and/or economic significance of the disaster-hit region plays an important part. So as the bottom-line: it is true that weather can effect the financial markets both positively and negatively, however, it is quite unlikely that one would figure it into his or her highly sophisticated equations until an extreme change is observed, in which case it is usually a negative catalyst.