Finance & economics | Investing and the weather

Jackpot frost

Cold weather and stockmarket returns go hand-in-hand

“THE weather is like the government,” wrote Jerome K. Jerome, “always in the wrong.” That may be true for those trying to organise a picnic or a cricket match, but when it comes to predicting the performance of stockmarkets, weather can be a good guide. Economists have long known that sunshine is good for stockmarkets, perhaps because nice weather makes people more optimistic. New research suggests that cold weather has an upside, too.

Ming Dong and Andréanne Tremblay of York University used data from Thomson Reuters’s global equity indices to examine the effect of local weather on the main market index in 49 countries from 1973 to 2012. They found, as expected, that warm weather sends prices higher—although when it gets too hot, the relationship breaks down. But their most striking finding was that thermometers and investors are not just fair-weather friends: very cold weather is also associated with higher returns. Why that should be is not clear. Mr Dong and Ms Tremblay surmise that cold stimulates risk-taking, referring to psychological studies in which participants reported increased aggression as temperatures dropped below -8°C (or 17.6°F).

The authors argue that there are fortunes to be made from the daily forecast. Based on the weather from 5am to 9am near the national stock exchanges in an assortment of countries, they predicted how each market index would perform on that day. The authors then took a long position in the market with the highest forecasted return and a short position in the one expected to do worst. Over the past few decades, they reckon, this approach would have generated an annual return of up to 25%.

The returns, however, vary wildly over time and by place. In hot countries, and in the Americas and Asia, the strategy would have made no money at all. Nor did Mr Dong and Ms Tremblay account for transaction costs. All the same, their findings may bring some cheer to the long, cold, dark Nordic winters.

This article appeared in the Finance & economics section of the print edition under the headline "Jackpot frost"

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