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Mention risk-taking in the depths of winter, and Canadians might turn their thoughts to dangerous road conditions, snowmobiling on thin ice or skiing off-piste in avalanche country. What seems less likely is that they would be more inclined to take stock market risks – and reap higher returns –when temperatures plunge.

That's one of the more intriguing findings from an ambitious study of the daily effects of changing weather on benchmark indexes in 49 countries over a 40-year period. And here's the best news for Canadians and others faced with interminably long winters: The colder the temperatures get, the better the returns appear to be … provided the snow's not too deep.

The study, by Ming Dong and Andréanne Tremblay of York University, confirms previous behavioural research and weather studies that show the positive effect of sunny skies, comfortable temperatures and increased outdoor activity on stock market returns in all countries. Fine weather fosters greater optimism, which boosts share buying.

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Similarly, it should come as no surprise that oppressively hot weather saps the will of people to reach for their buy-and-sell apps.

But it turns out that downright chilly temperatures don't keep the bears or the bulls hibernating.

A minus reading on the thermometer "stimulates risk-seeking and stock buying," the authors conclude. "This finding is incompatible with the comfortable weather hypothesis, because it is unlikely that during winter times in the cold region, lower temperature leads to [a] happy mood."

It is, however, consistent with findings from behavioural research that show "subjects tend to exhibit increased aggression or risk-seeking behaviours" at very low temperatures, the study says.

The researchers took five weather variables – sunshine, wind speed, rain, depth of snow on the ground and temperature – and gauged their effect on nominal index returns from 1973 to 2012.

They found that even in an age of increasingly global investing, weather seems to be trumping fundamentals in cold, mild and hot countries. (For the purposes of the study, the U.S. is classed with the cold nations, despite all those retired baby-boomer investors living comfortably in southern climes).

The "impact of weather on investor behaviour is stronger and more pervasive than previously documented," the authors conclude.

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All of this has important economic implications, as well as providing opportunities for hedge funds to make serious coin through weather-based trading strategies.

"The magnitude of the weather effects on stock returns is substantial enough that daily fluctuations of weather conditions are capable of generating high volatility in the stock market, even in the absence of news about economic fundamentals," the authors note. "More broadly, this makes one question the purely rational explanations for other, non-weather anomalies."

If "completely extraneous and transitory factors such as the weather" can exert an irrational influence on returns, "it would seem reasonable that they can also be irrationally influenced by more economic-relevant forces such as the momentum and the book-to-market effects."

That's what the behavioural psychology crowd has been telling us for some time. And it's further evidence that the stubborn market rationalists are sheltering under an awfully leaky roof.


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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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