The Effect of Meteorological Conditions on the Stock Market: Demonstration from a Developing Economy

Abstract

This paper tries to explore the consequence of meteorological conditions on the stock market of Bangladesh by using several econometric techniques like the Ordinary Least Squares (OLS) model, General Autoregressive Conditional Heteroskedastic (GARCH) model, and Cross-correlation analysis of daily data or the period of 2018-2021. Exploration from the OLS model, the temperature is positively related to daily returns, daily turnover value, and daily market cap value; humidity is positively related to turnover value only. From cross-correlation analysis, the positive association among daily returns, humidity, and temperature; positive association between market cap and temperature; positive association among turnover value, humidity, and  temperature. From the GARCH model, statistically significant positive relationship between temperature and returns from the stock market; a statistically significant positive relationship among temperature, humidity, and turnover value from the stock market, and a statistically insignificant relationship
among temperature, humidity, and market cap value from the stock market. This is the first attempt to analyze the effect of meteorological conditions (humidity and temperature) on the stock market of developing nations like Bangladesh with
different econometric tools. By using the results of this paper, traders will think about their moods before trading onto the stock market; the regulatory body of the stock market will modify the trading system according to investors’ moods and
meteorological conditions.