Why Good Weather Isn't a Good Thing for Stock Markets
hubie writes:
A study suggests sunny weather can influence how investors perform and affect stock market prices:
Sunshine levels have a significant impact on the bidding behaviour of stock market investors, according to new research.
The study examined the relationship between sunny weather and how market participants perform, as well as the subsequent seasoned equity offerings (SEOs). These discounts for shares act as an effective tool for companies to raise finance and are essential for a functioning modern economy.
[...] The data revealed investors made higher bids in sunny periods, which led to lower discounts for shares in the primary market. In fact, just a one standard deviation increase in sunshine intensity caused bid discounts to decline by 2.4 percent, while a one standard deviation increase in sunshine duration caused bid discounts to drop by 3.33 percent.
Professor Jia Liu, CISF Centre Director and Professor of Accounting and Finance at the University of Portsmouth, said: "With sunny weather, often come good spirits - which in many circumstances is a positive, but that's not the case with financial decision-making. When the sunshine intensifies, bidders become overly optimistic and less risk-averse, which can lead to higher bid prices for seasoned equities."
Existing research has shown meteorological conditions, especially exposure to sunshine, affects a person's emotional state and sentiment. These weather-driven moods have been proved to influence a buyer's car choice, art prices at auction, and the tendency to take risks in a lottery.
[...] Professor Liu added: "We want to make investors aware that during periods of sunny weather, they become more optimistic about their investments. This will make them more inclined to take risks that aren't justified by asset values. Therefore, they should factor this consideration in when bidding for shares or they might suffer losses.
"Maintaining the stability of markets could depend upon our understanding of this phenomenon, since the onset of climate change might have an increasingly destabilizing impact on the judgment of investors and market-makers, with unpredictable consequences for global trading."
Journal Reference:
Qian Sun, Xiaoke Cheng, Shenghao Gao, Tao Chen, Jia Liu, Sunshine-induced mood and SEO pricing: Evidence from detailed investor bids in SEO auctions, Journal of Corporate Finance, 80, 2023, https://doi.org/10.1016/j.jcorpfin.2023.102411
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