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(Last updated 6/14/01)

SUNNY DAYS AT THE STOCK EXCHANGE GIVE LIFT TO MARKET, STUDY SAYS

COLUMBUS, Ohio - When the sun is shining on Wall Street, it does more than put the brokers in a good mood - it also gives a lift to the stock market.

David Hirshleifer
A new study has found that morning sunshine at the sites of 26 leading stock exchanges around the world - including the New York Stock Exchange - is linked to positive market returns that day.

The results showed that the daily difference in expected market returns between a completely overcast day and a sunny day is nine basis points (0.088 percent), or an annualized excess return of 24.8 percent.


This study is part of a new trend in finance in which researchers go beyond the purely rational, economic factors that govern the stock market.

"There's a great deal of evidence from psychology that sunshine helps put people in a good mood, and people in good moods make more optimistic choices and judgments," said David Hirshleifer, the Kurtz Chair in Finance at Ohio State University's Fisher College of Business.

"If people are more optimistic when the sun shines, they may be more inclined to buy stocks on sunny days."

Hirshleifer conducted the study with Tyler Shumway, assistant professor of finance at the University of Michigan. Their study has been conditionally accepted for publication at the Journal of Finance. It is also available online as a working paper at Ohio State's Department of Finance web site.

The researchers examined daily returns at the leading stock exchange in 26 countries (including such countries as England, Brazil and Singapore) from 1982 to 1997.

For each trading day in that 16-year period, they studied data on average cloud cover from 6 a.m. to 4 p.m. local time for the cities with the stock exchanges. All data came from the U.S. National Climactic Data Center.

When the researchers looked at the data from each city individually, results showed that more sunshine was associated with higher stock market returns in either 18 or 25 of the cities studied, depending on the way the test was conducted, Hirshleifer said.

More importantly, when the data from all 26 cities were combined, the results showed a strong overall relationship between sunshine and higher returns around the world.

The study took into account seasonal variations in sunshine in all 26 cities, as well as the effects of other weather conditions, such as rain and snow, he said. Still, even when these factors were controlled, sunshine gave stocks a lift. "Once the amount of sunshine is taken into account, we found that rain or snow have no further power to predict returns."

While the effect uncovered by the study is not large, a difference in returns of nine basis points between an overcast day and a sunny day is not something investors should ignore, Hirshleifer said.

"Our results suggest investors can trade profitably on the weather. It's not a way to get rich quick and there is risk involved. But if you're optimally balancing risk and return, you should indeed take into account the weather in your trading strategy," he said.

"Nine basis points sounds small but it is only one day's returns. The daily difference in returns annualizes to an extra 24.8 percent per year. By comparison, the annual return from holding the U.S. stock market is about 12 to 14 percent per year," he said.

"Of course, going in and out of the market involves extra transaction costs. But an investor who is planning to buy stocks sometime over the next week but doesn't care exactly when may gain from waiting for a sunny day. Someone who is selling may gain from waiting for an overcast day."

While people from all over the world may trade stocks on a given exchange, the weather in the city where the exchange is located is still important, according to Hirshleifer. For example, many of the large institutional investors that drive the markets are headquartered in the same cities as the stock exchanges, he said.

There are solid psychological reasons as to why sunshine may affect stock prices, Hirshleifer explained. While sunshine may put a person in a good mood, studies show people often misattribute why they are feeling good on a particular day. In other words, even though stock traders may feel more optimistic because of the sunshine, they may attribute their optimism to other factors, such as economic conditions or news about a company.

Other studies show people in good moods are not as likely to examine evidence as critically. This may lead traders to see positive signs about a company's stock on sunny days that they would not normally see in other weather conditions.

Hirshleifer said this study is part of a new trend in finance in which researchers go beyond the purely rational, economic factors that govern the stock market.

"Narrowly, this is a paper on the weather. More broadly, it is part of a new approach to finance that focuses on emotions, rather than purely intellectual, cognitive reasoning processes," he said.

"Perhaps the most interesting aspect of these findings is that they provide more direct evidence that moods and emotions do affect stock market prices."

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Contact: David Hirshleifer, (614) 292-5174;
Hirshleifer.2@osu.edu

Written by Jeff Grabmeier, (614) 292-8457; Grabmeier.1@osu.edu