There is a direct relationship between weather and people’s mood. Certain weather
conditions foster positive moods while others lead to negative moods. Subsequently, people’s
moods play a significant role in their decision-making process particularly when it comes to
investments. The literature review evaluates the impact of weather variables on people’s mood. It
further evaluates the impact of the each weather variable on stock returns.
1. Relationship between weather and mood
Watson proposed the two-dimensional model stating that an individual’s mood is either
measured or defined as a positive or negative state of mind that determines how people respond
to various stimuli. According to Watson (2000), from a psychological perspective, someone with
a negative mood either through stress or through depression is most likely to react negatively to
stimuli while a more happy or gleeful person (positive mood) is likely to respond positively to
stimuli. In terms of the effect of weather, people are likely to be in a negative mood when the
weather is gloomy or unfavorable. On the other hand, people feel happier (positive mood) when
the weather is sunny, clear and favorable. Schwarz (1990) developed the Mood-as-Information
hypothesis states that psychologically, feelings and mood determine the decision-making
process. The hypothesis is measured through risk perceptions and optimism.
There are multiple studies on the relationship between weather and mood and its ability
to affect an individual’s mood either positively or negatively. Denissen, Butalid, Penke, and
VanAken (2008) through their study analyzed the effect of six weather parameters, which are
precipitation, air pressure, wind power, sunlight, temperature, and photoperiod. According to the
study, there was no significant relationship between the parameters and the mood of the study
participants. There was a wide variation on the mood of the participants when exposed to the six
Does Weather Affect the Stock Market in Hong Kong?3
weather parameters. Denissen et.al (2008) however found that there was a significant effect of
wind power, sunlight and temperature on mood with temperature having a direct impact on
tiredness and subsequently negative mood. The study found that sunlight mediated the effects of
air pressure and precipitation on tiredness. The authors, therefore, concluded that lack of sunlight
combined with precipitation and air pressure negatively affect mood by aiding the level of
tiredness on people. The study also found out that wind negatively affects mood more in spring
and summers than in autumns and winters. This means that the season is a determining factor on
the impact of weather on mood irrespective of the weather parameter. According to (Li, Wang &
Hovy, 2014), individual characteristics are a major determinant of the impact of the weather of
mood and hence a variation in people’s mood to similar weather conditions. Some of the
individual characteristics that account for the mood variations include age, gender, and personal
traits.
Keller et al. (2005) undertook a study to determine the relationship between the number
of hours people spent outside and its effect on cognition and mood. The study established that to
the people who spent more than half an hour outside, higher pressure and temperatures were
linked to positive moods. On the other hand, individuals spending less than half an hour outside
had lower moods. According to Keller et al. (2005), spending less time in a favorable or pleasant
environment makes people perceive the indoor and mundane environment as unfriendly and
dreary, which may lead to negative moods. The study also found out that exposure to high
temperatures especially during spring leads to positive moods. On the other hand, higher
temperatures during summer lead to negative moods especially to individuals living in the
southern hemisphere where the temperatures are normally high. Keller et al. (2005) therefore
concluded that season is a determining factor when it comes to the effect of weather on mood.
Does Weather Affect the Stock Market in Hong Kong?4
The findings concur with Denissen et al. (2008) who found out that external factors (personal
traits) are a factor in determining the effect of weather on mood. However, Keler et al. (2005)
only used two weather parameters while Denissen et al. (2008) used six weather parameters
hence more dependable to test three mood aspects while also taking into consideration biological
and personality traits like gender and age.
Klimstraet al. (2011) also undertook a study to evaluate types of weather reactivity
through the examination of self-reported moods daily across 30 days. The study findings were
concurrent to those of Keller et al. (2005) and Denissen et al. (2008) by finding that even though
there is a relationship between weather and mood, the effect is minimal. The study classified the
participant’s moods into three types of weather reactivity. They were summer lovers (people who
experience good moods when temperatures are high and precipitation is low), summer haters
(people who experience bad moods when temperatures are high and precipitation is low) and rain
hater (people who experience bad mood with high precipitation). The finding from the study
found that the effect of weather on summer lovers was directly opposite to summer haters. This
demonstrates different weather reactivity types between individuals may be the reason why past
studies found little correlation between weather and mood. Klimstraet al. (2011) therefore
concluded that individual characteristics and precisely weather reactivity types are a major
determinant on an individual's perception of weather and its impact on their moods. Huibers,
DeGraaf, Peeters, and Arntz (2010) on the other hand found out that men have seasonal peaks of
sad mood and depression during summers while women have season peaks of sad mood and
depression during fall.
There is a direct relationship between weather and positive/negative mood. However, the
relationship between the two is minimal due to the major variances between the reactions of the
Does Weather Affect the Stock Market in Hong Kong?5
participants. Personal traits and seasons are the main recurring factor that plays a vital role as a
moderator of the impact of weather on mood.
2. How Mood Affect Decision-making and Risk Tolerance
Worthy, Byrne & Fields (2014) undertook a study on the impact of mood and emotion in
the process of decision-making. The study examined the impact of negative mood such as
anxiety, stress and worry and that of positive mood such as excitement during decision-making.
According to Apergis, Gabrielsen & Smales (2016), negative moods lead to individuals being
averse towards the unforeseen circumstances linked with the possibility of gaining future
rewards. Negative moods, therefore, lead to low prospection during the decision-making process
and favor short-term gains over long-term achievements. The study presented two-dynamic
choices with one decreasing option having short-term gain and an increasing option having long-
term gains. Individuals with negative moods were associated with short-term gains while those
with positive moods were associated with long-term gains. The study introduced the
reinforcement-learning model that integrates state-based and reward-based information.
Additionally, Worthy, Byrne & Fields (2014) found that negative emotion was associated with
higher delay discounting based on the standard delay-discounting task. Individuals with negative
moods prefer to maximize immediate return rather than improvement of future returns.
Jennifer Lerner (2015), undertook a study on the effect of anger and fear on risk
tolerance. Anger and fear greatly influence decision-making and the level of risk tolerance and
individual is willing to undertake. According to Learner (2015), fear leads to uncertainty and
therefore an individual is risk-averse. Individuals with fear are likely to prefer immediate gains
compared to long-term gain even in situations where the long-term gains are more. On the other
hand, anger instills confidence among individuals and may lead to higher risk tolerance.
Does Weather Affect the Stock Market in Hong Kong?6
Individuals with anger are likely to make risky decisions than clam individuals. Anger is an
activating emotion that relies on stereotypes that makes individuals eager to rush decisions. In
the case of poor decision-making, angry people are more likely to blame other people for their
misfortunes (Keller et al. 2005). Anger is a trigger-happy impulse that makes individuals to
desire rewards intensely.
On the contrary, Lerner (2015) with positive moods such as happiness are likely to take
more risks and choose higher long-term rewards at the expense of small immediate rewards.
Their decisions are based on the quality, likability, and attractiveness of the option. Moods
therefore not only affect the nature of decisions and level of risk tolerance but also the speed.
Keltner et al (2014) state that moods play an adaptive coordination role that triggers a set
of stimuli (Communication, experience, behavior, and physiology) that helps individuals handle,
with opportunities and problems. For example, a participant with anger was linked with the need
to change a situation and make a decision against a factor that is against the choice. The need to
make decisions with anger manifests psychologically but also experientially. It is also associated
with approach motivation neural activation traits and peripheral physiology changes that
encourage individuals to make hasty decisions.
According to Jacobsen and Marquering (2008), behavioral finance considers the impact of
psychological and cognitive characteristics when investors are making investment decisions.
There are multiple factors such as mood that limit an investor’s ability to make rational financial
decisions through the analysis of the relevant available information. There is a gap between the
expected/rational behavior and actual/normal behavior. (Schwarz & Bless, 1991) states that
mood plays an adaptive role by indicating when an investment decision requires extra attention
and subsequently more consideration. It is therefore imperative that negative moods signal risk
Does Weather Affect the Stock Market in Hong Kong?7
and therefore necessitates increased systematic processing and vigilance before making an
investment decision. On the other hand, positive moods signal a secure and safe option that most
likely leads to faster and heuristic processing and subsequently risk tolerance decisions.
A study by Bodenhausen et al. (2000) on the other hand states that systematic processing
associated with people with negative moods is not necessarily desirable compared to automatic
processing associated with people with positive moods. The study found that systematic
processing associated with negative moods may heighten anchoring effects by increasing
emphasis on the anchor. Correspondingly, negative moods reduce the accuracy of judgments due
to increased deliberative processing. The study also established that dysphoric people
demonstrate extreme rumination
Shahzad (2019) in his study established that positive mood when making finance
decisions embody trustworthiness and cooperativeness during the negotiation process. They
elicit concession, trust, and cooperation from the other parties. On the other hand, negative
emotions embody recklessness competitiveness and aggressiveness. Shahzad (2019) explained
that the difference between positive moods and negative moods is the time is taken and depth of
processing. Positive mood traits such as happiness entail high certainty appraisals. On the other
hand, negative traits such as sadness lead to low certainty, which also reduces the rate of risk
tolerance. Shim, Kim, and Ryu (2015) found o that high certainty moods such as happiness,
disgust, and anger lead to high heuristic process through increasing reliance on expertise rather
than the quality of argument and stereotype.
3. Weather and Stock Return
The behavior Finance Theory states that weather has a great effect on human behavior
particularly moods, which subsequently affect investor-trading decisions. Investors with positive
Does Weather Affect the Stock Market in Hong Kong?8
moods make different decisions from those with negative moods, which directly affect stock
returns (Kim, Ryu & Seo, 2014). Under normal circumstances, positive moods foster optimistic
investment decisions while negative moods lead to negative returns.
a) Relationship between cloud cover and stock return
Hirshleifer & Sumway (2003) undertook a study on the effect of cloud cover on stock
return from 26 countries over 15 years. The study established that low cloud cover leads to
sunshine and subsequently positive moods with investors evaluating their prospects more
optimistically when in good moods compared to when in negative moods. The nature of an
investor's mood affects behavior and judgment. The study also found out that when people are in
positive moods, they warm up to good things and find them more psychologically available and
salient that when in negative moods. Therefore dreary, dull, dim and depressing days with a
high amount of cloud cover leads to low stock returns. On the other hand, warm, bright and
cheery days with a low amount of cloud cover leads to high stock returns. Chang et al (2006) in
their study on the effect of cloud cover in the Taiwan Stock Market established that there is a
negative effect of cloud cover of stock returns.
Sanders (1993) in the study of the New York Stock Market established that cloud cover
significantly correlates to stock returns when simultaneously considered with other non-weather
variables. An analysis by month indicates that the stock prices increased by about 74% during
sunny January days and by 68% during January cloudy days. Ana analysis of the other months
except for January shows that there is a strong negative relationship between cloud cover and
stock returns. However, Sanders (1993) stated that the day of the week was a major determinant
of stock returns. There was a high level of stock return on weekends irrespective of the cloud
cover due to the “weekend effect”. On the other hand, the stock returns on Monday were always
Does Weather Affect the Stock Market in Hong Kong?9
negative irrespective of the cloud cover. The negative return on Monday was however less on
sunny days.
b) Relationship between humidity and stock return
Yoon & Kang (2009) undertook a study on the Korean Stock Market to establish the
effect of humidity on stock returns. The study established that humidity has an insignificant
effect on stock returns based on the insignificance of the test coefficients. However, the study
established that extremely high humidity conditions lead to low stock return. Extremely low
humidity led to high stock returns. However, there was no correlation between humidity and
stock returns during the post-crisis period. Dowling & Lucey (2005) also undertook a study to
evaluate the effects of weather on stock prices. The study found on extreme humidity conditions
affected stock returns. Therefore, mild humidity conditions had no impact on stock returns.
However, other external forces like the 1997 financial crisis significantly affect the effect of
humidity when its effect became insignificant due to the adoption of an electronic trading system
and removal of foreign restriction investors. While extreme humidity affects investor moods,
market efficiency is the main determinant of stock returns.
Chang et al (2006) used a threshold model to study the relationship between stock return
and humidity. His study was undertaken in Taiwan between 1997 and 2003 and found that the
impact of humidity on stock returns is insignificant. Farrukh (2019), in his study, stated that
humidity negatively affects the volume of trading at the stock exchange. The study found that
normal levels of humidity do not affect stock prices. However, under extremely high levels of
humidity, higher humidity negatively affects the prices of returns wile extreme low levels of
having a positive effect on stock prices. However, he noted that calendar effects are a
determining factor when it comes to financial markets. There are high stock returns during the
Does Weather Affect the Stock Market in Hong Kong?10
spring and winter months irrespective of the level of humidity. The level of stock activity is also
high in January
c) Relationship between air pressure and stock return
Farrukh (2019) studied the effect of weather parameters on stock returns including air
pressure. The study established that air pressure has a marginal correlation on stock returns at
10% significance level. This means that high air pressure leads to high stock returns while low
air pressure marginal leads to a decrease in stock returns. However, the study established other
controlling variables like Halloween dummies, January and Mondays. The study specifically
established that January and Halloween Dummies have a positive effect on the trading volume at
the stock market irrespective of the level of air pressure.
Goldstein (1972) demonstrates that there is a positive correlation between air pressure
and stock returns. Air pressure is one of the most mood-inducing weather variables. Exposure to
high air pressure is likely to prompt positive moods while low air pressure induces negative
moods. The impact of air pressure is more prevalent in technology stocks compared to blue-chip
stocks due to the high impact of moods on the process of decision-making due to the abstract,
risky and uncertain nature of the stocks. Likewise, Baker and Wirgler (2006) add that new,
unprofitable, volatile and smaller companies with a high possibility of growth are more affected
by positive or positive mood induced by high and low air pressure consecutively.
Schneider (2010) states that air pressure is more likely to affect stock return more than
any other weather variable. The effect of air pressure is more significant since almost all the
investors in the stock market are exposed to the same air pressure. When many investors are
exposed to similar health conditions, the weather effect is more profound. Air pressure unlike
other weather variables like temperature, cloud cover, and wind, is available to both outdoor and
Does Weather Affect the Stock Market in Hong Kong?11
indoor investors. In most situations, private and professional investors make investment
decisions indoors meaning that there is no exposure to outdoor weather conditions.
d) Relationship between temperature and stock return
From a psychological perspective, high temperatures are associated with positive and
upbeat moods during winter and negative moods during summer. Yoon & Kang (2009)
undertook a study on the Korean Stock Market on the impact of the temperature of stock returns
and established that during the pre-crisis period, there is a positive influence between low
temperatures high stock returns. The findings imply that stock returns are usually high when
there are low temperatures and low when the temperatures are high. On the other hand, high
temperatures harm stock returns, which means that high temperatures led to low stock returns. A
similar study during the post-crisis period indicates that there is no relationship between
temperature and stock returns. The study, however, indicates that weather had no effect on stock
returns during the post-crisis period due to the removal of foreign investment restrictions, which
encouraged foreign investments. It, therefore, implies that local weather did not have a direct
effect on a stock investment, which made the market more effectively.
Cao and Wei (2005) also undertook an experiment on the effect of weather and stock
returns. The study established that there is a negative relationship between temperature and stock
returns. Higher temperatures translated to low stock returns while low temperature led to high
stock returns. Low temperatures lead to aggression, which leads to risk-taking while high
temperatures lead to apathy, which leads risks to risk averseness. Chang et al (2006) who
undertook a study on the Taiwan stock market presented a similar view. The study also found
that there is a negative correlation between temperature and stock returns in Taiwan. Jacobsen &
Marquering (2008) on the other hand stated that the effect of temperature on stock returns is
Does Weather Affect the Stock Market in Hong Kong?12
spurious with summer and winter seasonality a major determinant of its effect. According to the
study, high temperatures during winter are likely to lead to high stock returns while low
temperatures during winter leading to low stock performance. On the other hand, high
temperatures during the summer are likely to lead to low stock returns while low temperatures
during the summer leading to high stock returns.
e) Relationship between wind speed and stock return
There is a correlation between the speed of wind and mood, which subsequently affects
the decision-making process. Farrukh (2019) undertook a study on the effect of wind speed on
stock returns. According to the study, there is a pervasive and significant wind effect on stock
activity. The speed of wind directly affects comfort and mood, which consequently affect
decision-making and judgment in situations involving risk and uncertainty. This concurs with the
misattribution argument. Bouteska & Regaieg (2018) in their study established that the effect of
wind speed is more significant compared to that of other weather variables like temperature and
sunshine which implies that wind speed has a stronger impact on emotions and mood than the
two.
Similarly, Olha Zadorozhna (2009) states that the speed of wind affects stock returns
negatively. Strong winds are a nuisance and disruptive and often lead to negative moods. On the
other hand, a calm environment with little or no wind disruption brings tranquility, which leads
to positive moods. The study states that hot, wild and exhilarating or bothersome wind blows
through an individual's mind as strong as it blows on the surface. Therefore, strong winds are
associated with low stock returns while low speed or lack of winds may lead to high stock return.
Rehse et al (2019) stated that the negative effect of strong winds on moods and
subsequently stock returns is higher during summer and spring season that during the winter and
Does Weather Affect the Stock Market in Hong Kong?13
fall season. Besides, hot and dry winds have high levels of positive ions formed through friction
with strong winds. They often result in irritability, allergies hyperactivity, and listlessness
(negative moods). Wind may not be necessarily fierce and strong but maybe constant, which also
leads to low stock returns. This, therefore, demonstrates that, as is the case with other weather
variables, there are external factors that determine the extent to which weather affects stock
returns.
f) Alternate views for the above results do not hold
While the weather is a key determinant to the mood of individuals, which affect their
decision-making process and risk tolerance, other factors affect the hypothesis. According to
Sanders (1993), the day of the week may affect the impact of weather on stock returns. For
example, the level of stock return is high on weekends irrespective of the weather condition
compared to other days of the week. Contrary, Monday is always associated with low stock
returns regardless of the weather condition.
While high temperatures negatively affect stock prices, the condition depends on the
season of the year. Under normal circumstances, high temperatures during the summer are likely
to lead to low stock returns while low temperatures during the summer leading to high stock
returns. For example, high temperatures during winter are likely to lead to high stock returns,
which mean that the above results do not hold. On the other hand, low temperatures during
winter leading to low stock performance.
Other factors that affect the results above are government regulations and the economic
climate of a specific country. For example, external forces like the 1997 financial crisis in South
Korea significantly nullified the impact of weather conditions on the stock crisis. While weather
conditions affected the stock process normally during the pre-crisis period, the situation was
Does Weather Affect the Stock Market in Hong Kong?14
different during the post-crisis. While temperature reacted normally during the post-crisis period,
the effect of cloud cover and humidity was insignificant due to the adoption of an electronic
trading system and removal of foreign restriction investors. The decision allowed an influx of
foreign investors who were not affected by local weather.
According to Dowling & Lucey (2005), extreme humidity conditions affect stock returns.
Extreme humid conditions led to low stock prices while extremely low humidity led to high
stock prices. Mild humidity conditions, on the other hand, had no impact on the stock returns.
While extreme humidity affects investor moods, market efficiency is the main determinant of
stock returns (Shim, Kim & Ryu, 2015). With an efficient market, unfavorable weather
conditions may not necessarily lead to a decrease in stock returns, conversely, inefficient market
conditions may lead to poor performance even when the weather conditions are favorable.
The impact weather conditions are more prevalent in technology stocks relative to the
conventional blue-chip stocks. The significance is mainly because of the substantial role moods
play during the decision-making process when it comes to nonfigurative, risky and uncertain
stocks (Klimstra et al 2011). Additionally trading with stocks from new, unprofitable, volatile
and smaller companies are more affected by mood than established profitable stocks.
4. Other Mood proxies and Stock Returns
Other mood proxies other than weather affect moods and subsequently stock returns.
Some of the proxies include seasons, personal characteristics, and mental conditions among
others. One of the main factors is a seasonal affective disorder (SAD). The seasonal affective
disorder is a type of distress that takes places simultaneously every year, mainly during winter.
SAD can influence an individual’s state of mind, mood, and levels of energy negatively affecting
major life aspects including the decision-making process (Bassi, Colacito & Fulghieri, 2013). It
Does Weather Affect the Stock Market in Hong Kong?15
leads to feeling irritable, stress, anxiety, loss of pleasure and interest, low self-esteem,
depression, and loss of mood. This condition often leads to a decrease in stock returns.
Kamstra, Kramer, and Levi (2003) states that there is an uncommon type of seasonal
affective disorder that starts in late spring or pre-summer until the fall. Generally, seasonal
affective disorder begins in winter or fall until early summer or spring. With the level of winter,
light changing the more one moves away from the equator, SAD is prevalent among individuals
living about 30 degrees latitude south or north including the United States and Asia. The
seasonal affective disorder is caused by less sunshine during winter and fall, which prompts the
mind to release less serotonin, which is a concoction, connected to cerebrum pathways that
determine an individual’s mood. The condition affects around 1% to 2% of people, especially
young children and women. However, the milder winter depression affects between 10% and 20
% of individuals (Kamstra, Kramer & Levi, 2003). This means that during the winter, stock
returns are likely to decrease to between 1 and 2% and between 10% and 20% during milder
winter conditions.
The lunar phase is also a mood proxy that affects people behavior in the stock market.
Lunar phase refers to the different phases of the moon during the year, which affects people's
moods and behavior across the year. During the full moon, people are most likely to be angry
and violent which may lead to swift decisions without consideration (Kim, 2017). Additionally,
the full moon may lead to lack of sleep, which may make an individual behave in an inexplicable
way or erratically (Floros & Tan, 2013). Lack of enough sleep during full moon causes negative
moods, which may negatively affect the stock returns. Additionally, new moon lacks sufficient
light and energy, which leads to negative moods and subsequently low stock returns. On the
Does Weather Affect the Stock Market in Hong Kong?16
other hand, the first half of the lunar cycle makes an individual feel motivated, therefore foster
positive moods, and subsequently high stock returns.
Does Weather Affect the Stock Market in Hong Kong?17
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