How does weather influence market return and trading activity in Belgium?

Details

Supervisors

D'Hondt, Catherine

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

enThe literature in psychology has extensively studied the influence of weather conditions on individuals' mood, showing that several climatic variables, such as sunshine, rainfall or temperature, affect people's emotional states through their impact on daily life. In parallel, behavioural finance research has already established a link between mood and investment decisions. As a result, we could expect to observe an influence of weather-induced moods on financial markets. For instance, weather conditions that put investors in a better mood could lead them to increase their trading activities, while the opposite could occur with climatic factors that negatively influence mood. Given this context, researchers explored the relationship between weather and financial markets but generally relied on market data and almost never focused on retail investors' trading activity. To address this gap, we therefore decided to study the influence of weather conditions on market return and retail investors' trading activity in Belgium. The first section of this master's thesis is dedicated to the literature review, while the second relates to the empirical analysis. Three datasets were used in the empirical part: one focusing on Belgian weather conditions, another on two Belgian market indices, and a third one containing monthly data from 5,064 retail investors over nearly 20 years. Through the use of OLS regressions, we find that sunshine and precipitation are significantly related to market returns. In addition, we distinguish between potential and active investors, finding that these two groups are affected differently by weather variables when conducting analyses at an aggregate level. Panel regressions then reveal that investors' number of transactions and monetary trading volume in Belgium are negatively correlated with sunshine and temperature, but positively associated with precipitation. The purchasing behaviour also tends to be influenced by these three weather conditions.