Abstract
This study investigates the relationship between stock returns and local weather through a new channel—the influence of the air-cooling system installed in the New York Stock Exchange (NYSE). To our knowledge, we are the first to employ the use of air conditioning to examine whether and how weather, especially excessively high temperature, and other factors affect stock returns. Using data for 1885–1914, we show that lower Dow Jones Average (DJA) returns were significantly associated with hotness before the NYSE trading rooms were equipped with the cooling system in 1903, whereas this correlation is largely weakened afterward. We also find that before the introduction of the air-cooling system, the negative effect of high temperatures on stock returns was stronger when the precipitation was lower. We obtain consistent results when controlling for the calendar anomalies such as the May-to-October effect, the Monday effect, and the effect of macroeconomic conditions.
Highlights
The linkage between weather and stock market returns has been long documented, especially in the literature on finance and psychology
While explaining stock returns through a sentimental way and relating pricesetting to Mother Nature are intuitively appealing, many researchers suspect that stock prices are not systematically affected by the local weather and that the changes in stock returns might be explained by seasonal anomalies such as the “Sell in May and go away” behavior [3]
Using daily weather data for New York City and the daily indices of the Dow Jones Average (DJA) from 1885 to 1914, we find that the stock return was significantly negatively correlated with the excessively high temperature before the installation of the cooling system, whereas this correlation was insignificant thereafter
Summary
The linkage between weather and stock market returns has been long documented, especially in the literature on finance and psychology. This paper re-visits the presence of weather’s mood effect on the stock returns from a new perspective—the influence of the air-cooling system installed in the New York Stock Exchange (NYSE). Our hypothesis is that if weather, especially the excessively high temperature, affects stock returns through traders’ moods, this effect should be weaker after the installation of the air conditioning system because the traders were better protected against the hotness by the cooling system. Using daily weather data for New York City and the daily indices of the Dow Jones Average (DJA) from 1885 to 1914, we find that the stock return was significantly negatively correlated with the excessively high temperature before the installation of the cooling system, whereas this correlation was insignificant thereafter.
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