Friday, October 28, 2005

It's Getting Chilly: Buy Stocks?

Forget about hot cocoa -- if it's cold outside, we're calling our brokers.

There's new proof that the stock market rises when it's cold outside.

Uncomfortably cold weather seems to stimulate aggressiveness and a willingness to take risks, contend Melanie Cao and Jason Wei, professors of finance at York University and the University of Toronto.

According to Psychology Today:
Apathy prevails in the heat, the team reports in the Journal of Banking and Finance. The two researhers sorted through decades of data from eight major stock exchanges around the world. They found that the lower the temperature, the higher the stock returns. In general, cool summer days beat real scorchers, and exceptionally frigid winters make for exceptionally high returns.
Their work is part of the growing field of behavioral economics, which aims to explore the important role emotions play in financial decision-making.

Behavioral economists contend that weather is an indicator of mood, as temperature affects mood, which in turn affects behavior.

Sunny days, for example, are also linked to high stock prices, possibly because sunshine increases optimism.

Most of this research would fly right over the heads of die-hard fundamentalists, but if you're a strong believer in sentiment indicators, the new weather report is yet more proof that numbers alone don't dictate equity prices.

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