Pennies From Heaven

Does the weather affect market volatility? Apparently, the answer is yes.

The relationship between the weather and stock market returns has been well documented both empirically and theoretically. We extend this literature by considering for the first time the impact of weather conditions on stock market volatility. Specifically, we analyze historical volatility using the extensive data set of Hirshleifer and Shumway (2003) which consists of daily measures of cloudiness along with stock market index returns for 26 stock exchanges internationally between 1982 and 1997. The empirical results suggest that sunnier mornings can be associated with higher levels of time-varying market risk as approximated by the conditional daily volatility of returns from GARCH and EGARCH models. The analysis of the VIX, VXO, VXN and VXD implied volatility indices for the CBOE offers further support to this finding.

Posted by on October 14th, 2008 at 1:42 pm


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