The Effect of Weather Variables on Stock Returns: Evidence from Pakistan

Abstract

Behavioral Finance theorizes the impact of weather’s effect on the daily stock return through its effect on the investors’ mood. This study examines the effect of weather variables on Pakistani stock market. A sample of 124 non-financial firms listed on Pakistan Stock Exchange have been selected through Judgmental sampling along with the daily weather for the period from 2010-2014. Daily returns are regressed on the three weather variables; Temperature, Humidity and Precipitation (Dummy). The analysis is conducted by controlling for Firm Size, Leverage Ratio and Industry Type (Dummy). The results demonstrate no effect of weather on the daily stock returns of Pakistan Stock Exchange. The findings of this study may benefit the financial managers, investors and financial management consultants in making policies regarding investment decision. Some directions are provided for future researches that may extend the literature and improve the limitations of this study.