weather affects market volatility

i am guessing that today's inactivity is partly due to snow in USA. i just had a power glitch and computer restarted.

Surely the servers sitting inches away from exchange dont understand there is a supposed to be a connection glitch

haha, that the weather has an effect on market volatility is highly unlikely. As I tell all my american friends: the USA is not the center of the universe, especially not in the forex market. So the market could care less about snow in the USA.

As a side note, most activity in forex comes from europe, not from the USA. And I believe the big banks probably have their own generators to be able to keep their stations running if there really is a power glitch. After all, billions of dollars are for them on the line, if they can't access the computers.

http://papers.ssrn.com/sol3/papers.c...act_id=1283169

interesting paper thanks.

probably, it is not just about power glitch. it is also about the mood and psychology of traders. maybe big firms ask their floor traders not to trade during depressed times like extreme weather.

IHO: The weather cannot affect forex in any way, especially the weather in the USA for example. As for the servers: there are many back-ups in all levels.
Even in terms of psychology or mood of the traders, I think that the individual traders' mood cannot affect the market, because there are other things: willing to make profits, etc

Couldn't agree less. The market IS the collective mood of traders.
What has a greater effect however in terms of weather is space weather. The sun's activity has a measurable and predictable effect on all our behaviour.

Than there also should exist meteorological analysis. It would go great together with astrological and astronomical. Whatever works....

P.S. Saying prayers before opening a trade also helps. God bless

LOL. Don't lump science like astrophysics in with the mumbo jumbo of astrology. Also, as an aside, god, any god, is a figment of the imagination.....

dr_who, by "mood" I meant only "mood", not "expectations". Expectations can and will always affect the market.

Are you an astrologer? if not, how do you know astrology is mumbo jumbo?
If god is a figment of imagination you could easily answer those 3 questions:
1)where do we come from?
2)who we are?
3)what is sense of life?

P.S am i an ***hole? pretty much, i know, there is nothing i can do about it

one last word i'm not religious...

This blows my tiny mind:
"our results suggest that cloudiness and length of nighttime are inversely related to historical, implied and realized measures of volatility"

...I know correlation <> causation but if it did, what reasons would you have for it? And if anyone could explain to me without citing Mystic Meg, that'd be great.

There was another stock market study recently - cold windy days are more probable to be down days. Their explanation was simple - trading is a lot about market sentiment, and on cold windy days humans feel less happy.

Another study found another interesting correlation - the market went down after days in which big comedy movies were released. Yes, this seems to be the other way around the above study.

All of these studies seem to imply the same thing: whatever changes human sentiment on a big scale (weather, cultural events, ...), will also cause specific patterns in the financial markets.

I think all these studies demonstrated that many people aren't able to use/understand statistic, probably even some mathematicians don't understand what they are doing... at the college i had a professor who made a nice example:
Since oral cancer hits more frequently aged people (50-55 and above) is it safe to say that miniskirt protect people from cancer?
From a statistical point of view it is true, since mini skirt are frequently used by girls between 20-40 years old, while way less 50 yo women use it.
Obviously this statistic means nothing, it is a no sense, it's just a bunch of numbers who shows correlations...

one more thought, weather affects humans behavior, but we are talking about northern countries where day light is way less than usual because of earth inclination (depression is higher there). Saying that today is cold/windy/cloudy so everybody is depressed is some what pretentious...

Totally agreed. The problem is that you first need a real causal link. Well, and weather is far off from being really causal. The obvious cause for sentiment changes are fundamental news.
Next thing will be that some study shows that moon cycles or certain solar phenomena are correlated to stock market events. Totally ridiculous.
So there is a difference between causal correlation and just correlation. There needs to be a causual link. And guys if you really think about it, why the hell should weather influence people in their decisions and not some fundamentals instead? Especially nowadays everybody from all over the world can trade any markets. The more people are involved from all around the world, the less you will be able to identify weather as the cause for volatility changes, since weather is different all around the world.

Here's your causal link:

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Kamstra, Kramer and Levi (2003, hereafter KKL) draw a link between stock market returns and the length of day light. By examining the stock returns in the U.S., Canada, U.K. and Germany and a few other countries, they find that lower returns are associated with longer nights. Their explanation rests on the impact of Seasonal Affective Disorder (SAD) on human behavior. Based on the psychological and clinical evidence, the authors conjecture that lower returns are caused by investors who are depressed because of longer nights.

...

In particular, the psychological literature indicates that very high or very low temperatures cause aggression and very high temperature can also induce hysteria and apathy. Given this psychological finding, we hypothesize that lower temperature is associated with higher stock return due to aggressive risk taking while high temperature can lead to either higher or lower stock returns since both aggression (associated with risk taking) and apathy (associated with risk averting) are possible consequences the net impact on investors’ risk taking depends on the trade off between the two.

Apparently, the common feature shared by these studies is this chain of thinking: environmental variables, such as sunshine, length of day light and temperature, affect people’s mood which in turn influences people’s behavior. Such thinking is motivated and supported by literature on mood and decision-making. For example, Schwarz (1990), and Loewenstein, Weber, Hsee and Welch (2001) provided theories linking mood and feelings to general decision-making, while Etzioni (1988), Romer (2000), and Hanock (2002) established the importance of emotions in economic decision-making. Mehra and Sah (2002) showed theoretically that the emotional state of investors will influence equity prices when investors' subjective parameters such as risk aversion change in response to mood fluctuations.

...

In particular, we perform the bin test and regression analysis used in CW (2005) for an expanded sample which includes 27 international markets. Moreover, we use alternative tests (including non-parametric methods) to further examine the relationship between temperature and stock returns. Our additional tests and results (using either CW’s original sample or an expanded data set) confirm the uncovered stock market temperature anomaly documented in CW (2005).

...

We provide strong evidence in support of the uncovered negative relationship between temperature and stock returns. This relationship prevails even after controlling for the Monday effect, the tax loss effect, the sunshine effect and the SAD effect. More importantly, our non-parametric tests, as opposite to the parametric or semi-parametric approaches used in previous studies, demonstrate that this negative relationship is robust to distributional assumptions. Based on the sub-sample analysis, we find that this negative relationship is stable over time. Furthermore, we consider temperature deviation and demonstrate that this negative relationship is not just a level effect.

========

Anyway, feel free to dismiss this research without a thorough analysis just because it doesn't fit your world view.

I don't think human can be analyzed looking at the weather, too many other factors have to be implied.
Your team win lose championship
getting married
having a child
divorce
getting/relieving from a disease
someone dies family/friends
just bought a new car/house
there are other million factors..
when someone states today is sunny, so people is happy, means this guy decided to fit his theory with numbers.

Kamstra, Kramer and Levi (2003, hereafter KKL) draw a link between stock market returns and the length of day light. By examining the stock returns in the U.S., Canada, U.K. and Germany and a few other countries, they find that lower returns are associated with longer nights.

In other words they found out that during winter (longer nights). we have lower returns, couldn't it be because we are at the end of the year? when industries make the sum of the year?
i'll go a little deeper:

Given this psychological finding, we hypothesize that lower temperature is associated with higher stock return

lower temperature means winter, but this time during winter we have higher stock return...

is it me or there is something wrong?

this means that during winter stocks operator go short, since stocks during the same period (winter) goes higher? again did i misunderstood?

For me it's more than ok believing in that, what i dislike is the way those guys try to test their theory with scientific tests!!! you can't test a car looking just at the engine, you have to look the whole picture, and we are taking about a car, a human is way more complicated

Adal, fascinating stuff thanks for the info. That sounds plausible (though probably not tradeable).

Beman, people thought analysing social media to deduce sentiment was bonkers two years ago. While whether you got laid or not last night may be the biggest driver of how you felt this morning, collectively sunshine drives vitamin d drives seratonin drives mood to some extent. Financial markets are based on confidence. Perfectly reasonable to see how there could be a link.