Temperature Effect: How to do it?

Weather effect is another interesting research in finance. It is actually an argument for the traditional finance that relies much on rational behavior assumption. So, whenever you write problem statement for this topic, start it with the argument on rational behavior. I firstly read paper of Saunders (1993) then followed by Dowling and Lucey (2005). It really attracted me. How come weather may affect stock price? Right?

Who support it? A lot! For example, Loewenstein (2000) argues that the emotions and feelings influence our decision making process. It may dictate our long-term cost and benefits, hence, it will affect the equity pricing. The logic is simple, when it is rainy day, we tend to feel lazy compared to bright day (we tend to be aggressive). This emotion may affect our decision making. If it is rainy day, we tend to have our leisure time, meanwhile, during sunny day we tend to be rushed out (Yet, this debatable even in psychology field). Continue reading →