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Stormy connection: Sunny weather linked to poor stock market performance

A recent study has shed light on the connection between sunshine levels and the bidding behavior of stock market investors, revealing a significant impact on the way market participants perform. 

This research has implications for the seasoned equity offerings (SEOs) market, where discounts for shares play a crucial role in helping companies raise finance and are vital for a thriving modern economy.

In order to investigate whether sunshine intensity and duration influenced investor decision-making, an international team of researchers, including members from the University of Portsmouth Centre for Innovative and Sustainable Finance (CISF), analyzed weather station data to pinpoint periods when the climate had the most significant effect on investors. 

What the researchers learned

The results of the study unveiled that investors made higher bids during sunny periods, leading to lower discounts for shares in the primary market. Specifically, a one standard deviation increase in sunshine intensity resulted in a 2.4 percent decline in bid discounts, while a similar increase in sunshine duration caused bid discounts to drop by 3.33 percent.

Professor Jia Liu, CISF Centre Director, commented on the findings: “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.”

Previous research has demonstrated that meteorological conditions, particularly exposure to sunshine, can influence an individual’s emotional state and sentiment. This weather-driven mood shift has been proven to affect various aspects of decision-making, from a buyer’s choice of car and art auction prices to the propensity to take risks in a lottery.

The groundbreaking work of Edward Saunders, who first identified a link between investment behavior in Wall Street and the weather two decades ago, served as an inspiration for the current study. 

“Saunders inspired our study. His results strongly supported the hypothesis that investor psychology influences asset prices. And despite strong evidence that this has a large economic impact, there has since been little research into the relationship between the weather and stock market performance in the primary stock market,” explained Professor Liu.

Focusing on the primary market

Saunders’ study, however, focused only on stock prices in the secondary market. To further expand upon his work, the current research team opted to explore investor behavior in the primary market instead. 

Professor Shenghao Gao, from the Southwestern University of Finance and Economics in China, noted: “The China Securities Regulatory Commission (CSRC) requires that SEO issuers disclose detailed investor bidding information during the SEO auction process, providing us with a unique opportunity to examine the effect of sunshine-induced mood on investors’ decisions in the primary market.”

SEOs, which involve discounts for shares, serve as an effective tool for companies to raise finance and are crucial for a functioning modern economy.

The research team analyzed a sample of 1,625 auction-style SEOs, representing 28,321 bids from 2,978 investors between 2006 and 2019. In addition to the connection between sunshine and a bidder’s decision-making, they discovered that this effect increases when a company’s SEO offering is more complex or when its corporate background is less familiar to investors.

Why this research is important

Published in the Journal of Corporate Finance, the paper highlights the importance of these findings for primary market investors. Investors should be cognizant of the impact that weather conditions can have on their investment decisions. 

Professor Liu further explained: “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.”

These findings carry significant implications for policy and practice, as the growing instability of weather systems worldwide and the established connections between climatic conditions and investors’ behaviors render this issue increasingly relevant in a financially interdependent world. 

“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,” added Professor Liu.

The study carries profound implications for policy and practice, particularly in light of the growing instability of weather systems throughout the world and the established connections between climatic conditions and investors’ behaviors. 

In summary, this research highlights the significant influence of weather conditions, particularly sunshine, on investor decision-making. It underscores the need for investors to be cognizant of the potential impact of weather on their decisions. The study also emphasizes the importance of developing a deeper understanding of this phenomenon in the context of a world grappling with the challenges posed by climate change.

How weather impacts the human psyche

Weather is known to have a substantial impact on the human psyche, influencing mood, behavior, and cognitive function. The effects of various weather conditions on our mental and emotional state can be both direct and indirect, and they manifest differently in different individuals. Here are some ways in which weather can influence the human psyche:

Sunshine and mood

Exposure to sunlight plays a critical role in the production of serotonin, a neurotransmitter that contributes to feelings of happiness and well-being. Adequate sunlight exposure can improve mood, boost energy levels, and alleviate symptoms of depression. Conversely, lack of sunlight, as experienced during the winter months or in regions with less sunlight, can lead to Seasonal Affective Disorder (SAD), a type of depression that typically occurs during the colder months.

Temperature and cognition

Studies have shown that both extremely high and low temperatures can negatively impact cognitive performance. High temperatures can lead to discomfort, irritability, and reduced focus, while cold temperatures can impair reaction time, memory, and the ability to process information.

Rain and emotions

Rainy weather is often associated with feelings of sadness, lethargy, or even anxiety. The lack of sunlight, combined with the gloomy appearance of the sky, can contribute to negative moods. Moreover, rainy weather can lead to reduced outdoor activities, social isolation, and increased time spent indoors, which can further impact mental health.

Wind and anxiety

Windy conditions can induce feelings of restlessness, anxiety, or irritability in some individuals. The constant noise and motion of wind can be overstimulating, leading to an increase in stress levels.

Humidity and discomfort

High humidity levels can cause physical discomfort, which may lead to irritability, fatigue, and reduced cognitive performance. High humidity can also impact sleep quality, which can further influence mood and overall well-being.

Barometric pressure and migraines

Changes in barometric pressure have been linked to the onset of migraines and headaches in some individuals. Migraines and headaches can negatively impact mood, cognitive performance, and overall well-being.

In conclusion, weather can have a significant impact on the human psyche through various mechanisms, including the production of neurotransmitters, physical comfort or discomfort, and the influence on outdoor activities and social interactions. 

Understanding the ways in which weather affects our mood and behavior can help us develop coping strategies and adapt to changing conditions to maintain mental well-being.


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