In the mood to trade? Weather may influence institutional investors' stock decisions

Weather changes may affect how institutional investors decide on stock plays, according to a new study by a team of finance researchers. Their findings suggest sunny skies put professional investors more in a mood to buy, while cloudy conditions tend to discourage stock purchases.

The researchers conclude that cloudier days increase the perception that individual stocks and the Dow Jones Industrials are overpriced, increasing the inclination for institutions to sell.

The research paper, "Weather-Induced Mood, Institutional Investors, and Stock Returns," has been published in the January 2015 issue of The Review of Financial Studies. The research was collaborated by Case Western Reserve University's Dasol Kim and three other finance professors (William Goetzmann of Yale University, Alok Kumar of University of Miami and Qin Wang of University of Michigan-Dearborn).

Institutional investors represent large organizations, such as banks, mutual funds, labor union funds and finance or insurance companies that make substantial investments in stocks. Kim said the results of the study are surprising, given that professional investors are well regarded for their financial sophistication.

"We focus on institutional investors because of the important role they have in how stock prices are formed in the markets," said Kim, assistant professor of banking and finance at Case Western Reserve's Weatherhead School of Management. "Other studies have already shown that ordinary retail investors are susceptible to psychological biases in their investment decisions. Trying to evaluate similar questions for institutional investors is challenging, because relevant data is hard to come by."

Building on previous findings from psychological studies about the effect of sunshine on mood, the researchers wanted to learn how mood affects professional investor opinions on their stock market investments.

By linking responses to a survey of investors from the Yale Investor Behavior Project of Nobel Prize-winning economist Robert Shiller and institutional stock trade data with historical weather data from the National Oceanic and Atmospheric Administration, the researchers concluded aggregated data shows that seasonably sunnier weather leads to optimistic responses and a willingness to buy.

The research accounts for differences in weather across regions of the country and seasons. They show that these documented mood effects also influence stock prices, and that the observed impact does not persist for long periods of time.

A summary of the research was also recently featured at The Harvard Law School Forum on Corporate Governance and Financial Regulation.

Journal Reference:

W. N. Goetzmann, D. Kim, A. Kumar, Q. Wang. Weather-Induced Mood, Institutional Investors, and Stock Returns. Review of Financial Studies, 2014; 28 (1): 73 DOI: 10.1093/rfs/hhu063

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Global warming's influence on extreme weather

Understanding the cause-and-effect relationship between global warming and record-breaking weather requires asking precisely the right questions.

Extreme climate and weather events such as record high temperatures, intense downpours and severe storm surges are becoming more common in many parts of the world. But because high-quality weather records go back only about 100 years, most scientists have been reluctant to say if global warming affected particular extreme events.

On Wednesday, Dec. 17, at the American Geophysical Union's Fall Meeting in San Francisco, Noah Diffenbaugh, an associate professor of environmental Earth system science at the Stanford School of Earth Sciences, will discuss approaches to this challenge in a talk titled "Quantifying the Influence of Observed Global Warming on the Probability of Unprecedented Extreme Climate Events." He will focus on weather events that -- at the time they occur -- are more extreme than any other event in the historical record.

Diffenbaugh emphasizes that asking precisely the right question is critical for finding the correct answer.

"The media are often focused on whether global warming caused a particular event," said Diffenbaugh, who is a senior fellow at the Stanford Woods Institute for the Environment. "The more useful question for real-world decisions is: 'Is the probability of a particular event statistically different now compared with a climate without human influence?'"

Diffenbaugh said the research requires three elements: a long record of climate observations; a large collection of climate model experiments that accurately simulate the observed variations in climate; and advanced statistical techniques to analyze both the observations and the climate models.

One research challenge involves having just a few decades or a century of high-quality weather data with which to make sense of events that might occur once every 1,000 or 10,000 years in a theoretical climate without human influence.

But decision makers need to appreciate the influence of global warming on extreme climate and weather events.

"If we look over the last decade in the United States, there have been more than 70 events that have each caused at least $1 billion in damage, and a number of those have been considerably more costly," said Diffenbaugh. "Understanding whether the probability of those high-impact events has changed can help us to plan for future extreme events, and to value the costs and benefits of avoiding future global warming."

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