Does ENSO Impact Equity Returns? Evidence via Country and Panel Regression

Abstract

This study employs a panel local projections (LP) model to analyze the influence of El Niño (EN), La Niña (LN) Southern Oscillation (ENSO) on real equity returns based on twenty economies, collectively accounting for 80.2% of global output. We demonstrate that an ENSO shock has a delayed and oscillatory effect on equity returns, where the most significant impact is positive (negative) during an EN (LN) phase. We further analyze the climate state by each of the twenty economies. The literature shows that the effect of an ENSO shock on economic growth can vary across different economies. A main finding is that we show a near uniform result similar to the panel LP model, which we posit is driven in part by strong interconnections of financial markets on a global scale. These findings offer valuable insights for policymakers and investors. Highlights We estimate a panel and economy-specific climate ENSO switching via LP model. Twenty economies representing 80.2% of global output are analyzed. ENSO shock has a delayed and oscillatory effect on equity returns. Most significant impact of an ENSO shock on equity returns is positive (negative) during an EN (LN) phase.