Testing for temperature anomaly in capital markets of Pakistan and India

Abstract

This study shows temperature-based indicator impact on trading decision and stock returns to financial investors. By using disaggregated data, we showed that stock markets deviate (anomalies) from fundamentals and contradicts the rule of efficient market hypothesis. Among other anomalies, temperature anomaly is said to be driven through psychological factor of investors' moods which can influence their trading decisions. We find a statistically significant but negative relationship between Karachi temperature and KSE-100 index returns for the period of 2 January 2006 to 31 December 2015. However, Mumbai temperature seems to have no impact on BSE-100 index for the period of our research. Using GARCH methodology, the study incorporates daily temperature data from two South Asian financial hubs and their respective impact on stock returns. The findings of this paper can be further extended to analyse whether other economic sectors are influenced by the temperature-based stock market anomalies.