An empirical investigation of the correlation of stock returns and the weather at the Nairobi Stock Exchange.

Abstract

This paper examined the relationship of stock returns to a stochastic variable, the realization of the weather. Psychological studies support the existence of an influence of weather on mood. It could affect the behaviour of market traders, as suggested by some authors, and this should be reflected by the stock returns. Proponents of behavioural finance argue that investors routinely and systematically make cognitive errors, thereby resulting in prices that deviate from the pure rationality of an efficient market. One implication of this view is that events which alter the mood, temper, confidence, or physical, mental or emotional state of investors can have significant effects on, asset prices regardless of their effects on asset fundamentals. Using data from the NSE and the meteorological department the impact of weather on trading days at the NSE was investigated with a view to establishing, inter alia, the probable efficacy of mounting profitable weather based trading strategies at the bourse. A five year period from January 1998 through to January 2003 was examined. Using the daily NSE 20 share index prices, mean percentage change in the index was calculated and this was paired up with the cloud cover measure for that particular day. Statistical tests carried out on this data revealed that the NSE 20 share index value was not affected by the prevailing weather conditions in Nairobi at the time.