Investing in the stock market can be a risky experience. Sunshine, moods and stock returns have a statistically reliable relationship, according to new research done by David Hirshleifer, the Kurtz chair in finance at the Fisher College of Business.
“There is a lot of evidence from psychology that sunlight affects people’s moods and also affects how people behave,” Hirshleifer said. “If people are more optimistic when the sun shines, they may be more inclined to buy stocks on sunny days.”
Papers have been written on how sunshine influences markets. In 1993 E.M.J. Saunders wrote in the “American Economic Review” that when it is cloudy in New York City, the New York Stock Exchange index returns tend to be negative.
Hirshleifer started his research in 1982 with Tyler Shumway, assistant professor of finance at the University of Michigan. They wrote a paper on their research called “Good Day Sunshine: Stock returns and the Weather.”
Their research found that moods affect how people evaluate stocks. When people evaluate arguments in good moods they tend to be less critical and more receptive to the arguments, even weak ones, than when they are in bad moods.
Hirshleifer and Shumway gathered data from 26 cities around the world that had major national stock exchanges from 1982 to 1997. The weather data was collected from the International Surface Weather Observations (ISWO) sold by the National Climactic Data Center. The data contains detailed descriptions of the weather at 3,000 locations worldwide.
“What we did was from the daily level we looked at the statistical relation between stock returns in each country and the weather,” Hirshleifer said.
According to the statistics, the research proved a highly reliable relationship between the two.
“When there’s more cloud cover, stock returns are on average lower,” he said.
When looking at all 26 countries in the U.S. stock market this proved to be true. They found on sunny days the average return would work out to 25 percent annually, but on cloudy days the return dropped to less than 9 percent.
In their evidence Hirshleifer and Shumway found people making bad investment decisions because they are influenced by their moods. The most important recommendation when trying to evaluate a stock or what the stock market is worth, is to take a step back and evaluate ones mood at the time.
“It’s been found that when you point out to people the thing in their environment that’s affecting their mood, then they are able to adjust for it,” Hirshleifer said.
Hirshleifer advises people to be cautious if basing their investments on the weather. The research is still fairly new and critics say not just traders who live in one city influence stock prices, but investors all over the country make stock market trades.
Hirshleifer and Shumway said that they do not expect New York to be the only influence in stock prices. They did point out, however, that most of the major institutional investors and brokerages are located in New York and most of the important exchanges are made there.
Hirshleifer is working to extend this research and to understand whether seasonal variations and weather conditions might be related to seasonal moods in stock prices.
