The Influence of Temperature on Stock Market Returns in Mild Climates: A New Perspective on the Temperature Anomaly

This paper studies the influence of temperature on stock returns in mild climates. Psychological studies have shown that the weather affects mood, leading to alterations in the behaviour and perception of investors. This paper examines European financial markets in mild climates for the existence of the temperature anomaly. In addition, I propose a new perspective on the influence of temperature on stock returns. This new approach uses the temperature changes in respect to the preceding day instead of absolute temperatures, taking the reference dependence of thermal perception and the absence of extreme temperatures into consideration. I apply both methods on four European financial stock indices using ordinary least squares regressions. The analysis reveals no inevitable prove that the temperature anomaly exists in financial markets with mild climates. However, I find a positive relationship between stock market returns and temperature changes in respect to the preceding day, analogous to the linkage between sunshine and stock market returns. Student