Under Pressure: Stock Returns and the Weather

Abstract

This paper uses a novel approach to analyze the weather's effect on stock returns. In contrast to previous studies, I focus on barometric pressure to analyze whether there is a weather effect because only barometric pressure is physically experienced by all decision makers, be they indoors or outdoors. Psychological studies show that high barometric pressure induces positive moods. Comparing large cap, small cap, and technology stocks, I find that barometric pressure has a strong, robust, and economically significant positive impact on stock returns. The effect is strongest for technology stocks and for small stocks. Controlling for other weather variables used in previous studies, I conclude that barometric pressure is the main weather variable affecting stock returns. Moreover, it is possible to predict the next day's return.