Weather effects on the returns and volatility of the Shanghai stock market 國際財管 指導老師 : 何啟銘 學生 : 林武義 學號 :ma380204

ABSTRACT In order to analyze the influence of the opening of B-share market to domestic investors, it is assumed that domestic investors are more sensitive to the Shanghai local weather than foreign investors. In doing so, extreme weather condition dummies are generated by using the 21-day and 31-day moving average and its standard deviation. Empirical analysis provides two key results regarding weather effects.

1. Introduction The Shanghai stock market provides a unique( 獨特 ) source for examining ( 檢查 )weather effects. The Shanghai Stock Exchange(SHSE) divides its stock market into a domestic board (A-share) and a foreign board (B-share). Most of the ownership of A-share is restricted to residents of domestic investors, while that of B-share is restricted to foreign investors. However, starting from 19 th February,2001,Chinese domestic investors are allowed ( 允許 )to trade B-shares. This paper primarily examines whether there is a relationship between the stock market and three specific weather variables such as the temperature, humidity, and sunshine duration, using the Shanghai A-and B-share indexes.

2. Literature review Psychologists have been long interested in the influence of sunshine on individual’s behaviors. Saunders[5]reported that cloud cover was negatively correlated with the daily returns of New York stock indexes. Keef and Roush [10,11] examined the weather effect on the returns of New Zealand financial securities using three local weather factors : cloud cover, temperature and wind. In this paper, we improve the above studies in two points of view. First, we define weather variable using a new method proposed by Yoon and Kang [17].

3. Data and methodology We consider the daily weather data for temperature, humidity, and sunshine duration in Shanghai from January 1996 to December 2007, obtained from the China Meteorological Administration ( GARCH(1,1) Where stochastic error ε t is normally distributed; ht is conditional variance ; all parameters( ω, α and β ) must be positive; the sum of α + β < 1 quantifies the persistence of shocks to volatility.

4. Empirical results

5. Conclusions In order to examine the weather effect, extreme weather condition dummies were generated by using the 21-day and 31-day moving average and moving standard deviation. The dummies were included in the linear model and GARCH(1,1) model for sample return series and their volatility, respectively( 分別 ). Two key results regarding the weather effects on the returns and volatility of the Shanghai stock market were provided by the empirical analysis conducted.