Relationship among weather effects, investors' moods and stock market risk: An analysis of bull and bear markets in Taiwan, Japan and Hong Kong

Abstract

Literature shows that weather encourages people to engage in certain behaviors and that three factors, particularly sunshine, temperature, and humidity, have the greatest psychological impact on investors (Edgar Howarth and Michael S. Hoffman 1984). On the contrary, some results indicate that the weather has insignificant effect on investors (Ben Jacobsen and Wessel Marquering 2008; Jing Lu and Robin K. Chou 2012). Hence, our research used three weather variables, namely temperature, humidity, and cloud cover, to detect the effects of extreme weather conditions on stock returns. The sample data used in this study consisted of the intraday data, with thirty minutes stock price, of Taiwan, Japan, and Hong Kong from 2012 to 2015. By taking into consideration the effects of asymmetric volatility, we employed the GJR-GARCH model to capture stock market returns. In addition, as the volatility of the stock market is affected by a number of economic factors, this study included the market situation, whether a bear or bull market type, as an additional condition to explore whether market condition renders the weather effects more significant. The results of this research support relevant literatures and can be used as a reference for investors.