Nonlinear Effects of Temperature on Returns and Investor Optimism–Pessimism from Winner and Loser Stocks

Chai Liang Huang, Lai Ferry Sugianto and Mu Shu Yun
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Chai Liang Huang: Department of Finance, National Chung Cheng University, No. 168, Sec. 1, University Road, Min-Hsiung Township, Chiayi 621, Taiwan
Lai Ferry Sugianto: Department of Finance, National Chung Cheng University, No. 168, Sec. 1, University Road, Min-Hsiung Township, Chiayi 621, Taiwan
Mu Shu Yun: Department of Finance, National Chung Cheng University, No. 168, Sec. 1, University Road, Min-Hsiung Township, Chiayi 621, Taiwan

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2023, vol. 26, issue 01, 1-76

Abstract: Contrary to findings from prior empirical studies, which show that temperature affects stock returns linearly, we find that the relation of temperature with stock returns is nonlinear. The results show that investors got higher returns under both extremely hot and cold temperatures than under comfortable temperatures. More specifically, we find that hot temperatures led to higher returns only for investors from warm-climate countries with a tropical or subtropical climate. In contrast, cold temperatures led to higher returns only for investors from cool-climate countries with a temperate or polar climate. With further investigation, we found that such hot-temperature effects on returns in warm-climate countries are enhanced when the investor is optimistic about the stock market due to having recently invested in winner stocks. Conversely, the cold temperature effect on returns in cool-climate countries is strengthened when the investor is pessimistic due to having recently invested in loser stocks.

Keywords: Temperature; nonlinearity; stock market performance; optimistic winner; pessimistic loser (search for similar items in EconPapers)
JEL-codes: G12 G41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S0219091523500030

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