Temperature Anomaly: Evidence from South Asian Countries

Abstract

This study inspects the relationship between extreme temperature and stock returns. Efficient market hypothesis proposed that investors are rational and stock prices represent all information so it is not possible to manipulate the market and earn abnormal returns. On the other hand, it has been observed that stock markets deviate (anomalies) and contradicts the rule of EMH. Among other anomalies, Temperature anomaly is said to have psychological impact on investor’s moods and emotions which in turn shape their investing behaviors. Studies of human moods and psychology has found that lower temperature can result in aggression whereas high temperature can lead a human to both aggression and apathy (Cao & Wei, 2005). Using GARCH methodology, the study will incorporate daily financial and temperature data from two South Asian cities and their respective stock exchanges, named as: Pakistan Stock Exchange situated at Karachi, Bombay Stock Exchange based at Mumbai. This comparative study is an effort to find the answer of whether temperature anomaly has an effect on the Stock returns based at the financial markets of South Asian countries.