Weather effects on the returns and volatility of the Shanghai stock market

• Published in: Physica A Vol. 389; no. 1; pp. 91 - 99
• Main Authors: Kang, Sang Hoon, Jiang, Zhuhua, Lee, Yeonjeong, Yoon, Seong-Min
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 2010
• Subjects: Anomaly; Climatology; Domestic; Efficient market hypothesis; Financial market openness; Investment sentiment; MA-MSD method; Markets; Raw materials; Standard deviation; Volatility; Weather; Weather conditions; Financial market openness; Anomaly; 89.65.Gh; Efficient market hypothesis; MA-MSD method; Investment sentiment
• ISSN: 0378-4371; 1873-2119
• DOI: 10.1016/j.physa.2009.09.010

This study investigates the weather effects on returns as well as volatility in the Shanghai stock market. In order to analyze the influence of the opening of B-share market to domestic investors, it is assumed that domestic investors are more sensitive to the Shanghai local weather than foreign investors. In doing so, extreme weather condition dummies are generated by using the 21-day and 31-day moving average and its standard deviation. Empirical analysis provides two key results regarding weather effects. First, the weather effect exists in the A-share returns, but does not exist in the B-share returns over the whole period. In addition, the post-opening period shows the strong weather effect on B-share returns only, indicating that the market openness to domestic investors results in the weather effect. Second, the weather effect has a strong influence on the volatility of both A- and B-share returns. Similar to the case of returns, the weather effect on volatility is explained by the openness of B-share market.