Stock Returns and Investors’ Mood: Good Day Sunshine or Spurious Correlation?

Kim, Jae (2016): Stock Returns and Investors’ Mood: Good Day Sunshine or Spurious Correlation?

Abstract

This paper examines the validity of statistical significance reported in the seminal studies of the weather effect on stock return. It is found that their research design is statistically flawed and seriously biased against the null hypothesis of no effect. This, coupled with the test statistics inflated by massive sample sizes, strongly suggests that the statistical significance is spurious as an outcome of Type I error. The alternatives to the p-value criterion for statistical significance soundly support the null hypothesis of no weather effect. As an application, the effect of daily sunspot numbers on stock return is examined. Under the same research design as that of a seminal study, the number of sunspots is found to be highly statistically significant although its economic impact on stock return is negligible.

• Item Type: MPRA Paper
• Language: English
• Keywords: Anomaly, Behavioural finance, Data mining, Market efficiency, Sunspot numbers, Type I error, Weather
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

References

Akhtari, M. 2011, Reassessment of the Weather Effect: Stock Prices and Wall Street Weather, Undergraduate Economic Review, 7(1), http://digitalcommons.iwu.edu/uer/vol7/iss1/19.

Bialkowski, J., Etebari, A., Wisniewski, T.P. 2012, Fast profits: Investor sentiment and stock returns during Ramadan, Journal of Banking & Finance, 36, 835-845.

Cao, M. Wei, J. 2005, Stock market returns: A note on temperature anomaly, Journal of Banking & Finance, 29, 1559-1573.

Chang, S-C., Chen S-S, Chou, R. K., Lin Y-H. 2012, Local sports sentiment and returns of locally headquartered stocks: A firm-level analysis, Journal of Empirical Finance, 19, 309-318.

Chang, T. C.-C. Nieh, M.J. Yang, T.-Y. Yang 2006, Are stock market returns related to the weather effects? Empirical evidence from Taiwan, Physica A, 364, 343-354.

Connolly, R. A. 1989, An Examination of the Robustness of the Weekend Effect, The Journal of Financial and Quantitative Analysis, 24(2), 133-169.

Connolly, R. A. 1991, A posterior odds analysis of the weekend effect, Journal of Econometrics, 49, 51-104.

DeGroot, M. H. and Schervish, M. J. 2012, Probability and Statistics, 4th edition, Addison-Wesley, Boston.

De Long, J.B. and Lang, K. 1992, Are all Economic Hypotheses False? Journal of Political Economy, 100(6), 1257-1271.

De Prado, M. L. 2015, The Future of Empirical Finance, Journal of Portfolio Management, Summer, 140-144.

Dyckman, T. R. and Zeff, S. A. 2014, Some Methodological Deficiencies in Empirical Research Articles in Accounting, Accounting Horizons, 28(3), 695-712.

Edmans, Alex, García, Diego, Norli, Øyvind 2007, Sports sentiment and stock returns. Journal of Finance, 62, 1967–1998.

Gigerenzer, G. 2004, Mindless statistics: Comment on “Size Matters”, Journal of Socio-Economics, 33, 587-606.

Goetzmann, W.N., Zhu, N. 2005, Rain or shine: where is the weather effect? European Financial Management, 11, 559–578.

Haigh, J. D. 2007, The Sun and the Earth's Climate, Living Reviews in Solar Physics, http://www.livingreviews.org/lrsp-2007-2.

Häring, N. and Storbeck, O. 2009, Economics 2.0: What the Best Minds in Economics Can Teach You about Business and Life, Palgrave.

Hipel, K. W., McLeod. A. I. 1994, Time Series Modelling of Water Resources and Environmental Systems, Elsevier, Amsterdam.

Hirshleifer, D., & Shumway, T. 2003, Good day sunshine: Stock returns and the weather, Journal of Finance, 58(3), 1009– 1032.

Ioannidis, J.P.A. and Doucouliagos, C. 2013, What’s to know about credibility of empirical economics? Journal of Economic Surveys, 27, 5, 997–1004.

Jacobsen, B., Marquering W. 2008, Is it the weather? Journal of Banking & Finance, 32, 526-540.

Kamstra, Mark J., Kramer, Lisa A., Levi, Maurice D. 2000, Losing Sleep at the Market: The Daylight Saving Anomaly, American Economic Review, 90(4), 1005–11.

Kamstra, M. J., Kramer, L. A., & Levi, M. D. 2003, Winter blues: A sad stock market cycle, American Economic Review, 93(1), 324–343.

Kamstra, M. J., Kramer, L. A., & Levi, M. D. 2012, A careful re-examination of seasonality in international stock markets: Comment on sentiment and stock returns, Journal of Banking and Finance, 36, 934-956.

Kang, S., Jiang, Z., Lee, Y., Yoon, S., 2010, Weather effects on the returns and volatility of the Shanghai stock market, Phys. A Stat. Mech. Appl., 389, 91–99.

Kaplanski, G., Levy. H. 2010, Exploitable Predictable Irrationality: The FIFA World Cup Effect on the U.S. Stock Market, Journal of Financial and Quantitative Analysis, 45(2), 535-553.

Keef, S. P. and Khaled, M. S. 2011, Are investors moonstruck? Further international evidence on lunar phases and stock returns, Journal of Empirical Finance, 18, 56-63.

Keef, S. P. and Roush, M. L. 2002, The weather and stock returns in New Zealand, Quarterly Journal of Business and Economics, 41, 61–79.

Keef, S. P. and Roush, M. L. 2005, The influence of weather on New Zealand financial securities, Accounting and Finance, 45, 415–37.

Keef, S.P., Roush, M.L. 2007, Daily weather effects on the returns of Australian stock indices, Applied Financial Economics, 17, 173-184.

Kelly, P.J., Meschke, F., 2010. Sentiment and stock returns: the SAD anomaly revisited. Journal of Banking and Finance 34, 1308–1326.

Kim, J. H., Choi, I. 2016, Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Optimal Level of Significance. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2700659

Kim, J. H., Ji, P. 2015, Significance Testing in Empirical Finance: A Critical Review and Assessment, Journal of Empirical Finance, 34, 1-14.

Krämer, W. and Runde, R. 1997, Stocks and the weather: an exercise in data mining or yet another capital market anomaly? Empirical Economics, 11, 637–41.

Leamer, E. 1978, Specification Searches: Ad Hoc Inference with Nonexperimental Data, Wiley, New York.

Lehmann E.L. and Romano, J.S. 2005, Testing Statistical Hypothesis, 3rd edition, Springer, New York.

Lepori, G.M. 2015, Air pollution and stock returns: Evidence from a natural experiment, Journal of Empirical Finance, 35, 25-42.

Loughran, T. and Schultz, P. 2004, Weather, stock returns and the impact of localized trading behaviour, Journal of Financial and Quantitative Analysis, 39, 343–64.

Lucey B., Dowling, M. 2005, The role of feelings in investor decision making, Journal of Economic Surveys, 19, 2, 211-237.

MacKinnon, J. G. 2002, Bootstrap inference in Econometrics, Canadian Journal of Economics, 35(4), 615-644.

Manderscheid, L.V. 1965, Significance Levels-0.05, 0.01, or ?, Journal of Farm Economics, 47(5), 1381-1385.

McCloskey, D. and Ziliak, S. 1996, The standard error of regressions, Journal of Economic Literature, 34, 97–114.

Myers, L.B., and Melcher J.A. 1969, On the Choice of Risk Levels in Managerial Decision-Making, Management Science, 16(2), B31-B39.

Neal, R. 1987, Potential Competition and Actual Competition in Equity Options, The Journal of Finance, 42(3), 511-53.

Noby-Marx, R. 2014, Predicting anomaly performance with politics, the weather, global warming, sunspots, and the stars, Journal of Financial Economics, 112, 137-146.

Perez, M-E, Pericchi, L.R. 2014, Changing statistical significance with the amount of information: The adaptive α significance level, Statistics and Probability Letters, 85, 20-24.

Saunders, E. M. 1993, Stock prices and wall street weather, American Economic Review, 83(5), 1337-1345.

Trombley, M. A. 1997, Stock prices and Wall Street weather: additional evidence, Quarterly Journal of Business and Economics, 36, 11–21.

Wasserstein R. L. Lazar, N. A. 2016, The ASA's statement on p-values: context, process, and purpose, The American Statistician, DOI: 10.1080/00031305.2016.1154108

Yoon, S.M., Kang, S.H. 2009, Weather effects on return: evidence from the Korean stock Market, Physica A, 388, 682–690.

Yuan, K., Zheng, L., Zhu, Q. 2006, Are investors moonstruck? Lunar phases and stock returns. Journal of Empirical Finance, 13, 1–23.

Zellner, A. and Siow, A. 1979, Posterior odds ratio of selected regression hypotheses, http://dmle.cindoc.csic.es/pdf/TESTOP_1980_31_00_38.pdf.

Ziliak, S. T., McCloskey, D.N. 2008, The Cult of Statistical Significance: How the Standard Error Costs Us Jobs, Justice, and Lives, Ann Arbor, The University of Michigan Press.