According to new research, whether it is sunny or cloudy may be influencing the stock decisions of institutional investors. The results show that a sunny day may lead to more stock purchases. Due to the lack of solid data, the study is thought to be the first to analyze the trading behavior of institutional investors.
The study, “Weather-Induced Mood, Institutional Investors, and Stock Returns,” was published in the January 2015 issue of The Review of Financial Studies. Among the study authors was University of Michigan at Dearborn professor Qin Wang.
The research showed that cloudy days increased the likelihood that an investor thought both an individual stock and the Dow Jones Industrial Average were overpriced. The perception of stocks being overpriced led to a selling mentality. Investor optimism increased the propensity to buy. Apparently, investor mood correlated positively with the daily returns attributed to higher arbitrage costs.
Lead author, Case Western Reserve assistant professor of banking and finance, Dasol Kim, shared why this research is important and why they are the first to directly study it. “We focus on institutional investors because of the important role they have in how stock prices are formed in the markets. Other studies have already shown that ordinary retail investors are susceptible to psychological biases in their investment decisions. Trying to evaluate similar questions for institutional investors is challenging, because relevant data is hard to come by.”
Story Sourcing: Case Western Release.