Goetzmann Et Al 2014

Weather-Induced Mood, Institutional
Investors, and Stock Returns

William N. Goetzmann
Yale University
Dasol Kim
Downloaded from http://rfs.oxfordjournals.org/ at University of California, San Francisco on April 7, 2015

Case Western Reserve University
Alok Kumar
University of Miami
Qin Wang
University of Michigan at Dearborn
This study shows that weather-based indicators of mood impact perceptions of mispricing
and trading decisions of institutional investors. Using survey and disaggregated trade data,
we show that relatively cloudier days increase perceived overpricing in individual stocks
and the Dow Jones Industrial Index and increase selling propensities of institutions. We
introduce stock-level measures of investor mood; investor optimism positively impacts
stock returns among stocks with higher arbitrage costs, and stocks experiencing similar
investor mood exhibit return comovement. These findings complement existing studies on
how weather impacts stock index returns and identify another channel through which it can
manifest. (JEL D84, G11, G12, G14, G23)
A number of recent studies show that weather patterns in major financial centers
influence stock index returns and suggest that investor mood influences asset
prices. For example, using data from international stock exchanges, Hirshleifer
and Shumway (2003) show that stock market returns are higher on days when
the weather is sunny, which is presumably when market participants are in
a good mood.1 The findings from this finance literature are consistent with
evidence in the psychology literature, in that individuals misattribute mood
We thank two anonymous referees, Jawad Addoum, David Hirshleifer (the editor), George Korniotis, and Lisa
Kramer for helpful discussions and valuable comments. We thank seminar participants at the University of
Miami, Case Western Reserve University, University of Arkansas, and Western Finance Association. We are
responsible for all remaining errors and omissions. Supplementary data can be found on The Review of Financial
Studies web site. Send correspondence to Dasol Kim, Department of Banking and Finance, Weatherhead School of
Management, Case Western Reserve University, Cleveland, OH 44106-7235, USA. E-mail: [email protected].
1 Other studies that examine the impact of cloud cover on stock market index returns include Saunders (1993) and
Goetzmann and Zhu (2005). See Section 1 for additional details.
© The Author 2014. Published by Oxford University Press on behalf of The Society for Financial Studies.
All rights reserved. For Permissions, please e-mail: [email protected].
doi:10.1093/rfs/hhu063 Advance Access publication September 23, 2014
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The Review of Financial Studies / v 28 n 1 2015
induced by weather as information when making assessments about objects

that should be otherwise unrelated (e.g., sunny days with positive assessments
about the market).2
In this paper, we focus on the economic mechanism through which weather-
induced mood affects asset prices. In particular, we investigate how mood
affects the trading behavior of a group of investors that play a key role in
the price formation process: institutional investors. Despite commonly held
assumptions about investor sophistication, there is evidence that institutional
investors and other sophisticated market participants are also susceptible to

cognitive biases.3 Motivated by these findings, we conjecture that weather
patterns would affect the mood of institutional investors, in turn impacting
their trading decisions and stock prices congruently. We test this conjecture
using financial data from multiple sources that are matched to ZIP code-level
weather station data.
Similar to previous studies, we use deseasonalized cloud cover as our investor
mood proxy. In addition, we use survey data from the Yale International Center
for Finance that provide institutional investor perceptions on stock market
investment. Using the survey data, we are able to construct a variety of measures
that capture perceived investor mispricing. We also employ disaggregated data
that contain the daily trades of institutional investors. Finally, using weather
and institutional holdings data, we construct a novel, stock-level measure of
investor mood to assess its impact on individual stock prices. Our ability to
observe the locations of investors allows us to precisely measure the weather
conditions that they experience at each point in time.
Our findings can be summarized as follows. First, using the survey data,
we show that deseasonalized cloud cover increases the likelihood of perceived
overpricing in both individual stocks and the Dow Jones Industrial Average
(DJIA) among institutional investors. Second, using the trade data, we find
evidence consistent with the survey results, showing that institutional investors
with lower exposure to deseasonalized cloud cover exhibit a greater propensity
to buy. The impact of weather on beliefs and trading behavior is significant both
statistically and economically. In particular, a one-standard-deviation increase
in deseasonalized cloud cover increases the likelihood of perceived overpricing
by approximately 3%, which represents more than 13% of the sample mean.
Further, differences in trade imbalances between investors in the top and bottom
2 These studies show that individuals misattribute their affective states for information, resulting in mood-congruent
judgments. Supportive evidence using cloud cover as a mood priming device has been found in a variety of
contexts, including tipping (Cunningham 1979), life satisfaction (Schwarz and Clore 1983), and responsiveness
to persuasion (Clore, Schwarz, and Conway 1994).
3 For example, Coval and Shumway (2005) document trading patterns that are consistent with loss aversion among
traders in the Chicago Board of Trade. Frazzini (2006) finds evidence of the disposition effect among U.S. mutual
fund managers, whereas Barber et al. (2007), using international data, show consistent evidence in a broader
set of investors. More closely related to our study, Goetzmann and Zhu (2005) present evidence suggesting that
New York City weather patterns affect New York Stock Exchange market makers, while showing little effect on
retail investors.
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Weather-Induced Mood, Institutional Investors, and Stock Returns
10th percentile in deseasonalized cloud cover represent more than 9% of its

total sample variation.
Third, we assess how our stock-level proxy for investor mood relates to
individual stock returns. Because U.S. stock ownership is generally dispersed
across investors in different locations, tests using cloud cover in a single
location to proxy for mood may be biased due to poor identification. Our
proxy for investor mood uses institutional investor holdings data to incorporate
information about weather conditions faced by different investors in the same
stock. We find evidence that the stock-level mood proxy has a strong effect on

the daily returns of stocks associated with higher arbitrage costs. Finally, we
document return comovement attributable to the investor mood proxy and find
that these patterns are generally short lived.
These empirical findings contribute to the growing theoretical literature that
identifies the channels through which mood affects economic and financial
market outcomes.4 Studies that focus on the weather effect are motivated
by findings in the psychology literature that shows that affective states can
generate mood-congruent biases in risk-based decisions.5 Accordingly, investor
behavior may be subconsciously influenced by factors affecting mood unrelated
to market information and may in turn impact financial market outcomes (Mehra
and Sah 2002; Bodoh-Creed 2013; Kamstra et al. 2014).6 The salience of
cloud cover as a mood-priming device allows us to both verify the impact
of mood on beliefs and trading behavior of institutional investors and trace
price effects directly attributable to institutional investors using our stock-level
mood proxies.
Recent experimental studies also examine how mood-inducing cues related
to weather affect risk preferences and financial decisions of individuals and
document evidence consistent with mood congruency in assessments. For
example, Bassi, Colacito, and Fulghieri (2013) provide experimental evidence
suggesting that cloud cover has a strong impact on measures of risk tolerance.
Similarly, Kramer and Weber (2012) use experimental evidence to establish
a link between seasonal affective disorder (SAD) and risk attitudes. Whereas
these studies use subjects from the general population, professional investors
4 Edmans, Garcia, and Norli (2007) and Agarwal, Duchin, and Sosyura (2012) examine sporting and singing
competition outcomes. Dougal et al. (2012) and Garcia (2013) examine the impact of sentiment reflected in
financial news articles on stock market activity.
5 Schwartz (1990), Clore and Parrott (1991), Wilson and Schooler (1991), and Clore, Schwarz, and Conway (1994)
discuss the general role of mood and emotion in decision making. Loewenstein (2000) and Loewenstein et al.
(2001) discuss the role of emotion in judgment.
6 Mehra and Sah (2002) demonstrate that even small perturbations in preference parameters related to mood can
have a measurable impact on stock returns and volatility. Bodoh-Creed (2013) shows that informed market
participants can be more susceptible to mood-related biases. Motivated by the empirical regularities linking
seasonal forms of depression to equity and Treasury returns, Kamstra et al. (2014) construct a model that
incorporates seasonal dependence in both risk aversion and the intertemporal elasticity of substitution, showing
that it can match features of the data.
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may not necessarily be subject to the same dynamics.7 We offer direct

examination of how deseasonalized cloud cover impacts institutional investor
perceptions using survey data and provide evidence that investor optimism,
as measured by lower levels of deseasonalized cloud cover, decreases the
likelihood of perceived investor overpricing.
Other previous studies examine the effect of weather on investor trading
behavior. Loughran and Schultz (2004) and Goetzmann and Zhu (2005) use
disaggregated data to identify the impact of weather conditions across different
geographies. Loughran and Schultz (2004) show cloud cover around the firm’s

location has little impact on stock trading volume attributable to mood, except
in cases of extreme weather conditions. Goetzmann and Zhu (2005) match
retail investor trade data to cloud cover in five major U.S. cities from 1991 to
1996. They find the impact of cloud cover on investor propensities to buy and
sell is statistically insignificant. However, they find a strong relation between
bid-ask spreads of NYSE stocks and NYSE index returns with New York City
cloud cover. They interpret these findings as evidence of a weather effect on
market makers.8
To our knowledge, our study is the first to directly test for the weather
effect in institutional investor trading behavior. We provide evidence that
investor optimism increases buy-sell trade imbalances. Further, these results
complement our findings on investor perceptions of mispricing.
We provide evidence that investor optimism increases daily returns of
individual stocks associated with higher arbitrage costs. Binding short-sale
constraints may allow for mispricing to persist (Nagel 2005), as these stocks are
more costly to arbitrage. We acknowledge that our estimates may be understated
due to measurement error in the investor mood proxy. Specifically, we cannot
observe the daily holdings of institutional investors, as we rely on the most
recent quarterly snapshots for construction. As a result, the mood proxy may
not incorporate all investors trading in a stock between the reporting dates.
However, we also find evidence of return comovement attributable to investor
mood and find that these effects do not persist beyond one month.
Taken as a whole, our results provide strong evidence on how mood
influences how institutional investors form their beliefs, affecting their trading
decisions. Together with evidence from Goetzmann and Zhu (2005), our
findings suggest that the weather effect is detectable among sophisticated
market participants. More importantly, we demonstrate how investor mood
can influence various aspects of the price formation process.
7 For example, see Camerer et al. (1997) for violations of the law of supply on wage data for New York taxi drivers.
8 Linnainmaa and Rosu (2009) show similar evidence using weather conditions around the location of the Helsinki
Stock Exchange. In contrast with Goetzmann and Zhu (2005), their evidence cannot be explained by the role of
market makers, suggesting that their results are driven by investors.
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1. Theoretical Motivation
A number of studies document a robust relationship between stock index
returns and local weather patterns, referred to here as the “weather effect.”
Saunders (1993) shows that sky cloud cover over New York City has a strong,
negative association with New York Stock Exchange (NYSE) index returns.
Because his findings appear to relate to the local weather conditions around
the stock exchange, the results are plausibly attributable to factors related to
investor mood rather than to direct effects on firm fundamentals. Hirshleifer and
Shumway (2003) provide additional evidence using an international sample

of twenty-six stock exchanges. They find a similar relation between cloud
cover in the locations of the stock exchanges and the stock market index
returns, indicating that the relation between weather and stock market returns
is pervasive and not a result of unintended data mining.
Despite strong evidence of the weather effect on stock index returns,
establishing plausibility in mood-based explanations relies in part on
distinguishing which group of investors drives the weather effect. Given the
pervasiveness of these effects, the influence of mood should be detectable at
the investor level. In particular, by employing localized proxies for mood of
investors located in different regions, mood-based explanations of the weather
effect imply that we should observe similar patterns between mood and investor
trading behavior.
The use of sunshine, or sky cloud cover, as a proxy for mood is appealing,
as it is difficult to predict accurately and its influence on mood has been
well documented in the social psychology literature. A broad assertion in that
literature is that individuals can misattribute affective states for information,
which, in turn, affects judgment (Cunningham 1979; Schwarz and Clore 1983).
Several studies use sunshine as a priming device to induce positive affective
states and provide evidence that it corresponds with mood-congruent choices
in cases unrelated to clinical depression.9 The evidence has been documented
in a number of settings, including tipping (Cunningham 1979; Rind 1996),
life satisfaction (Schwarz and Clore 1983), and responsiveness to persuasion
(Clore, Schwarz, and Conway 1994).
Prior research also supports the idea that mood can have an intertemporal
effect on decision making. That is, judgment may not only be influenced
by immediate affective states but also by a composite of affective states
9 The effect of sunshine as an antidepressant has been well documented, though its effect on clinically depressed
individuals is thought to influence individual decision making in different ways (Wyer, Clore, and Isbell 1999).
Light therapy, which simulates sunshine, has been shown to have antidepressant benefits in individuals suffering
from seasonal (Rosenthal et al. 1984) and nonseasonal (Kripke 1998) forms of clinical depression. However,
these effects are distinct from mood attribution. In their seminal study, Schwarz and Clore (1983) find that
individuals generally respond more positively when asked about life satisfaction on sunnier days. Their key
finding is that the effect weakens when attention is drawn to the weather or their current mood before the start of
the interview. They find similar evidence in a different experiment within the same study that uses a nonweather
priming device. On the other hand, clinical depression is arguably a condition that is generally recognized by
the patient.
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experienced over time. Affective states can influence how individuals

encode information into memory; when information is subsequently recalled,
evaluation may be biased congruently according to the composite of prior
moods (Fishbein 1963).10
Additionally, the psychology literature provides evidence that emotion can
strongly influence responses when an individual is asked to extrapolate future
events (Johnson and Tversky 1983), as well as when asked to make assessments
on abstract objects in the presence of limited information (Clore, Schwarz, and
Conway 1994).11 Professional investors are likely to use information collected

over time to make financial decisions about a particular investment. Therefore,
the composite of affective states over time should be more informative about
how investor mood affects belief formation and trading behavior than the
investor’s affective state at a single point in time.
Turning to the clinical literature, studies that examine the impact of
simulated sunlight on seasonal and nonseasonal depression suggest that
repeated treatments over time, ranging from one to five weeks, are required
to produce antidepressant benefits.12 In their seminal study on seasonal
depression, Rosenthal et al. (1984) show that light treatment simulating
sunshine during clear sky days has stronger antidepressant benefits than does
treatment simulating sunshine in fully overcast days. When subjects were
withdrawn from light therapy, they showed that the subject conditions generally
reversed after one week. Similar evidence is in clinical studies on nonseasonal
depression (Goel et al. 2005).
The influence of cloud cover on mood also may be related to seasonal
variation in the number of daylight hours through its regulating role on
sunlight exposure, which is a well-documented factor responsible for symptoms
associated with SAD, as well as milder forms of seasonal depression (e.g.,
“winter blues”). Kamstra, Kramer, and Levi (2003) examine the influence of
seasonal forms of depression on stock market activity. They find strong evidence
that the number of daylight hours has a positive impact on stock index returns
using a broad set of stock exchanges in different locations spanning the Southern
and Northern hemispheres. Their results also support the role of mood on stock
market activity, though such effects are more likely to be related to disruptions
10 Fishbein (1963) argues that the composite effect of impressions formed on various components of the object
over time influences judgments. Adaval (2001) provides supportive, experimental evidence, demonstrating that
affective reactions to distinguishable aspects of a product together influence purchasing decisions, even when
those reactions may be unrelated to the object of assessment. Additionally, Kida, Smith, and Maletta (1998)
provide similar experimental evidence using a subject pool of experienced managers. The subjects are given
information at an earlier period and are asked to describe that information at a later point in time. They show that
subjects are better able to recall affective reactions at the initial exposure than the actual information presented.
11 Johnson and Tversky (1983) show that individuals attribute greater likelihood of particular events congruently
to mood, even when the event is unrelated to the cause of their mood. Clore, Schwarz, and Conway (1994) show
that the influence of affective states on judgment is pronounced in assessments of objects that are abstract or
when faced with limited information.
12 For examples, see Goel et al. (2005) for nonseasonal depression and Eastman et al. (1998) for seasonal depression.
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in biorhythm due to changes in seasons.13 Nevertheless, because light therapy

has been shown to be effective in treating both seasonal and nonseasonal forms
of depression, the influence of cloud cover on mood may not be completely a
seasonal phenomenon.
Our empirical design is motivated by these previous experimental and
clinical studies. Specifically, we use cloud cover to prime investor mood and
assess its impact on investor perceptions and trading behavior. Given that
investors plausibly rely on complex sets of information collected over time
for their decisions, we consider the intertemporal effects of cloud cover over

several weeks, rather than on a single day. Additionally, to distinguish factors
related to seasonal variation in cloud cover, we use deseasonalized cloud cover
as the main priming instrument.
2. Data and Summary Statistics

2.1 Main data sources
Our empirical analysis relies on data from several sources. First, institutional
investor survey data are collected from the Investor Behavior Project at Yale
University. Since 1989, questionnaire survey data have been collected on the
perceptions of investors in the United States about stock market investment.14
Approximately 100 professional investors are surveyed per month from January
2005 to February 2007.15 The response-level data include the date when the
respondent completes the survey as well as his or her location. To ensure data
consistency, we only use responses with values to the survey questions used
in the analysis. Altogether, there are 1,543 responses in the sample before they
are matched to the weather data described below.
Second, the weather data are collected from the Integrated Surface Database
(ISD) and are publicly available from the National Oceanic and Atmospheric
Administration Web site (www.ncdc.noaa.gov). The ISD database contains
hourly weather observations from over 20,000 weather stations worldwide,
of which 11,000 are currently active. For each weather station, we are able
to observe location and weather conditions, including sky cloud cover. We
collect hourly value of the weather variables from all U.S. weather stations
from January 1998 to December 2010.
Third, the institutional daily trading data are provided by ANcerno Ltd.
(formerly the Abel Noser Corporation). The sample period is from January
13 A similar mechanism can be found related to daylight savings due to sleep deprivation. Kamstra, Kramer, and
Levi (2000) document anomalous stock index returns patterns around daylight saving weekends in the United
States, the United Kingdom, and Germany.
14 Adetailed overview of the survey is described by Shiller, Kon-Ya and Tsutsui (1996) and Shiller (2000).Additional
information can be found at the International Center for Finance web site (icf.som.yale.edu) under “Stock Market
Confidence Indices.”
15 Institutional investor respondents are randomly sampled from a directory of institutional investors found in the
investment managers section of the “Money Market Directory of Pension Funds and Their Investment Managers.”
The survey is also conducted in the Japanese and Chinese markets.
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1999 to December 2010. ANcerno is a widely recognized consulting firm

that monitors equity trading costs of institutional investors, such as CalPERS,
Putman Investments, and Lazard Asset Management.16 The client manager
code along with the institutional client code allows for identification of the
investor. Additional fields used in the analysis include the stock historical
CUSIP number, trade date, trade direction, quantity of shares traded, and trade
execution price.
There are two unique features of the ANcerno data that are central to the
trade-related tests. First, the ANcerno dataset allows us to observe the true

direction (i.e., buy/sell) for all executed trades, eliminating the need to rely on
the Lee and Ready (1991) algorithm. Second, the ANcerno dataset provides the
identities of the institutions, allowing us to hand-collect the ZIP codes of their
locations. Our analysis uses only institutions located in United States, which
represents approximately 80% of all trades in the database.
Fourth, we obtain the 13(f) institutional holdings data from Thompson
Reuters for the 1999:Q1 to 2010:Q4 sample period. The data provides quarterly
snapshots of investor portfolio positions. The ANcerno database provides
trading information for only a subset of the investors in the 13(f) data. We
are able to hand-collect the ZIP codes of the institution’s headquarters using
the Nelson’s Directory of Investment Managers.
Other data sources used in the analysis are as follows. Stock characteristics
are collected from the Center for Research in Security Prices (CRSP). Only
common stocks (share code of 10 or 11) from January 1999 to January 2010
are included in the analysis. The county-level estimates of median household
income and population are obtained from the Bureau of Economic Analysis
(BEA).
Figure 1 presents the geographical distribution of institutional investors
represented in the survey (panel A), trade (panel B), and holdings (panel
C) datasets at the county level. Shaded counties correspond with regions in
which at least one investor is represented. All three panels convey considerable
geographical heterogeneity in each of the datasets. Panel A shows that the
survey respondents are geographically well represented and are more heavily
represented in regions with greater population. Panel B shows a similar pattern
within the trade dataset, though this geographical distribution is relatively
sparse relative to the survey data. This pattern is not surprising, given the limited
number of investors in the trade database. Panel C shows that the holdings data
have greater heterogeneity than do the trade data, which is again expected
because investors in the trade data represent only a subset of investors in the
holding data.
16 See Puckett and Yan (2011) for a detailed description of the ANcerno data.
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Panel A: Survey data
Panel B: Trade data
Figure 1
Geographical dispersion of the survey and trade datasets
This figure presents the geographical distribution of the survey in the United States (panel A), institutional
investor trade (panel B), and institutional investor holding (panel C) data on the county level. Black areas denote
the existence of at least one investor in the corresponding dataset at the county level.
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Panel C: Holdings data
Figure 1
Continued
2.2 Variable construction

2.2.1 Deseasonalized cloud cover measures. The primary variable of
interest from the weather data is the hourly sky cloud cover, which takes on
integer values from zero (sky clear) to eight (full cloud cover). Similar data are
used by Hirshleifer and Shumway (2003) and Goetzmann and Zhu (2005). The
survey and trade data are merged with the weather data using criteria based
on geographical distance. Specifically, using the location coordinates of each
station and investor, we calculate their distances based on the haversine distance
formula.17 The average daily sky cloud cover is calculated using hourly values
from 6 a.m. to 12 p.m., for each date and weather station, the time period
during which investors are most likely to observe outdoor weather conditions.
For each ZIP code, the average daily sky cloud cover is calculated using values
from all weather stations within a 50-kilometer radius of the investor’s ZIP
code centroid.18
Because mood may have an intertemporal effect on individuals, we compute
rolling averages of the cloud measure in each ZIP code based on information
from x days before to the response or trade date. Because the average amount of
17 The haversine formula calculates the distance between locations 1 and 2 as d

√
1,2 = 2×R × arcsin(min(1, A,
where R is the earth’s radius (approximately 6,371 kilometers), A = sin2 (lat/2)+cos(lat1 )+cos(lat2 )×
sin2 (lon/2). In this expression, lat = lat2 −lat1 and lon−lon2 −lon1 , where lat1 and (lat2 and lon2 )
is the latitutde and longitude of location 1 (2), respectively.
18 We also examine alternative distance thresholds. The results remain similar or strengthen in terms of statistical
significance when using a 30-kilometer threshold, though slightly weaken when increasing the threshold to 100
kilometers.
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sunlight is a decreasing, convex function in sky cloud cover, the sky cloud cover
measure used in the analysis (SKC) is defined as the natural logarithm of one
plus the rolling average of the ZIP code-level sky cloud cover.19 Additionally,
we require that each institutional investor has at least one matched weather
station included in the analysis. We note that measurement error in observed
cloud cover is likely to bias our tests from finding any effect.
To adjust for seasonality in the SKC measure, we consider two approaches.
First, we calculate seasonal cloud cover as the average daily cloud cover
for the same month over the entire sample period. Seasonal SKC is the

natural logarithm of one plus the seasonal value and can be used to control
for seasonality when assessing the impact of SKC in the tests. Second,
deseasonalized SKC, or DSKC, is defined as the difference between SKC and
Seasonal SKC.20 Including DSKC measure in place of SKC and Seasonal
SKC in an OLS regression model is equivalent to constraining the model
coefficient on Seasonal SKC to be equal to the negative of the SKC coefficient.
Because this representation may be too strong, we estimate the model using
both approaches.
2.2.2 Investor perceived mispricing measures. We begin the empirical

analysis by focusing on responses from the survey related to perceived
mispricing. To directly assess whether investors believe that stocks are
overpriced (or underpriced) relative to fundamentals, we examine the
association between the weather measures and responses to the question, “Stock
prices in the United States, when compared with measures of true fundamental
value or sensible investment value, are: (a) Too low, (b) too high, (c) just
right, and (d) do not know.” An indicator variable, TooHigh is constructed,
which takes the value of one to a response of “too high” and zero otherwise.
Similarly, TooLow takes the value of one to a response of “too low” and zero
otherwise.
Next, we construct a continuous measure of perceived mispricing using
reported values of what the respondent believes to be the intrinsic level of
the DJIA.21 The responses provide estimates of the investors’ perceptions on
the intrinsic value of the DJIA and can be compared with the actual DJIA
level around the survey date. A measure can be constructed representing the
percentage mispricing, or %DJIAMisPrc, defined as the natural logarithm of
the ratio between the survey response and the average DJIA level over the
19 The logarithmic transformation is motivated by the non-linearity in the relationship between illuminance and
sky cloud cover. However, similar results are obtained without the transformation.
20 The procedure to seasonally adjust the cloud cover measure is similar to that of Goetzmann and Zhu (2005) and
Hirshleifer and Shumway (2003). We find similar results when using the average cloud cover in the same month
in the previous year for the seasonal adjustment.
21 Specifically, the question asks, “What do you think would be a sensible level for the Dow Jones Industrial Average
based on your assessment of U.S. corporate strength (fundamental)?”
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past seven days. Lower values of %DJIAMisPrc are associated with relatively
greater overpricing.22
In the sample of investors examined, we conjecture that pessimism should be
positively related to perceived overpricing, as most of the survey respondents
are more likely to be limited in their ability to short stocks. However, there
are several key limitations affecting inferences with the TooHigh and TooLow
variables. Tests on those measures must assume that the respondents apply
similar criteria to assess mispricing. However, this assumption is likely to be
too strong. To address this issue, we construct similar binary variables from the

%DJIAMisPrc measure. Specifically, we code DJIATooHigh as a value of one
if %DJIAMisPrc is below the bottom sample quartile. Similarly, DJIATooLow
is coded with a value one if %DJIAMisPrc is in the top sample quartile.
The DJIATooHigh and DJIATooLow measures are based on a stock index
rather than on individual stocks, making it more likely that the respondents
are basing their responses on their perceptions of market trends rather than in
the context of their own portfolio holdings. We assess these five measures of
perceived mispricing to validate whether cloud cover is positively associated
with bad mood states.
2.2.3 Investor trade measures. We construct two measures based on the

institutional trade data. For both measures, we aggregate trades across all
investors for a particular stock within the same ZIP code. First, we construct
a measure of investor-level buy-sell imbalance, or Investor BSI Ratio, that
aggregates all buy and sell trades across stocks and is defined as the difference
between the daily dollar buy and sell volume across all investors in the dataset
in a particular ZIP code, scaled by the total dollar volume in the same date and
ZIP code. When there is no trade on a particular date, Investor BSI Ratio takes
a value of zero. Second, we construct an analogous measure of daily buy-sell
imbalance by investor and stock, or StockInvestor BSI Ratio. The measure is
defined as the daily, buy minus sell dollar volume scaled by the total dollar
volume for the same date, stock, and ZIP code. Because we cannot observe
daily positions, we only use dates where investors trade in the stock.
We aggregate trades at the ZIP code level given that the trade and weather
data are matched using investor ZIP code. Idiosyncratic trading behavior related
to other factors may serve to increase noise in the BSI measures unrelated to
geographical factors. To alleviate these issues, the analysis restricts the sample
to only ZIP codes with at least three investors at each point in time and with
at least half of the sample period available for the trade data. In addition, we
remove extreme observations associated with ZIP codes in the top and bottom
1% of the total dollar buy-sell volume over the entire sample.
22 The %DJIAMisPrc variable is expected to be negatively related to TooHigh, and indeed a paired t -test on the
difference between the group means of %DJIAMisPrc across values of TooHigh is statistically significant (t -value
= 28.81).
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2.2.4 Stock-level mood proxies. We construct a stock-level measure of

investor mood, or StockDSKC, measured approximately as the average DSKC
across locations of institutional investors based on their portfolio holdings.
Institutional investors in stock i are identified using the most recent 13(f)
holdings data. The weather data are linked to the ZIP code of the institution’s
location. StockDSKC is calculated as the logarithm of one plus the difference
between the average SKC and Seasonal SKC of all institutional investors in
stock ion date t. StockDSKC is updated daily, using the most recent holdings
data.23

2.2.5 Seasonal affective disorder proxy. In addition to the seasonally
adjusted cloud cover measure, we also condition the tests on seasonal factors
that may also affect mood. Our proxy for seasonal affective disorder, or SAD,
corresponds with the number of nighttime hours, which can be approximated
using a mathematical representation that takes into account the time of year and
the locational coordinate. SAD equals zero during spring and summer months
and the number of nighttime hours minus twelve during the other months. We
use the coordinate centroids of each investor’s ZIP code location to calculate
the SAD measure, using the procedure described by Kamstra, Kramer, and
Levi (2003).24 We note that the measure contains significantly less variation
in our sample than that of Kamstra, Kramer, and Levi (2003), given that our
sample focuses on the contiguous United States. On the other hand, they use
an international data sample. Additionally, the length of the sample period in
our data sources is also significantly smaller.
2.3 Summary statistics

Table 1 provides the summary statistics for the weather, survey, and trade
variables used in the analysis. Panel A describes the ZIP code level
deseasonalized sky cloud cover measures across different estimation windows.
The estimation window of x days calculates average DSKC using data from
days t −x to t. Because there is little theory to help guide the selection of the
estimation window used in the analysis, the comparison helps in pinning down
an appropriate length that yields well-behaved estimates.
As the estimation window increases, the sample average decreases in absolute
magnitude. The sample standard deviation also decreases monotonically,
following a convex pattern in the length of the estimation window. In particular,
the sample standard deviation of the measure that uses a one-day window,
which is most similar to the weather measure used by Hirshleifer and Shumway
(2003), is 0.695. The sample standard deviation decreases considerably up to
23 Using weighted averages based on investor position size does not qualitatively alter the results.
24 Kamstra, Kramer, and Levi (2003) also include a fall dummy variable in their tests to distinguish the impact
of SAD during the fall and winter. Because our tests are focused on isolating nonseasonal effects, we instead
include time fixed effects in some of the specifications.
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Table 1
Summary statistics on survey, trade, and holdings data
25th 75th
Variable Mean SD percentile Median percentile
Panel A: DSKC by estimation window (survey data)
1 day −0.204 0.695 −0.755 −0.086 0.376
3 days −0.085 0.444 −0.362 −0.032 0.234
1 week −0.067 0.346 −0.267 −0.044 0.173
2 weeks −0.049 0.263 −0.190 −0.041 0.124
4 weeks −0.045 0.223 −0.183 −0.039 0.097
Panel B: Survey data sample

TooHigh 0.195 0.397
TooLow 0.148 0.355
DJIATooHigh 0.252 0.435
DJIATooLow 0.253 0.435
%DJIAMisPrc −0.004 0.121 −0.031 0.014 0.060
Daily DJIA Volatility (pts) 0.620 0.153 0.486 0.610 0.698
ln(Portfolio Size) 14.541 5.136 12.899 14.732 17.910
Earnings Growth 0.071 0.087 0.040 0.060 0.080
ln(Population) 8.534 1.298 7.801 8.615 9.321
ln(Income) 6.022 0.284 5.823 5.984 6.178
SAD 0.812 0.997 0.000 0.158 1.544
Panel C: Trade data sample
DSKC −0.029 0.229 −0.161 −0.010 0.126
Investor BSI ratio 0.027 0.502 −0.270 0.000 0.334
Stock-Investor BSI ratio 0.000 0.591 −0.253 0.000 0.282
Panel D: Holdings data sample
StockDSKC −0.014 0.125 −0.095 −0.012 0.070
%IO 0.459 0.239 0.267 0.483 0.649
PosRet 0.473 0.499
This table reports summary statistics for the average sky-cloud coverage variables that are matched to the survey
dataset (panel A), other characteristics linked to or from the survey dataset (panel B), variables from and linked to
the ZIP code-level trade dataset (panel C), and variables from and linked to the ZIP code-level holding and stock
returns dataset (panel D). Please refer to Section 3 for descriptions of each dataset. SKC is the natural logarithm
of one plus the daily average sky-cloud coverage over 1 day to 4 weeks before the response or trade date. DSKC
is the difference between SKC and the seasonal value forSKC, calculated as the average cloud cover for the
same month over the entire sample. Portfolio size is the sum of the capital across asset classes reported by the
investor respondent. Population is the county-level population for the response year. Income is the county-level
median income for the response year. Earnings Growth is the percentage long-term growth rate estimate of the
respondent. Adjusted nighttime hours per day (SAD) is calculated using the procedure outlined by Kamstra,
Kramer, and Levi (2003), based upon the investors coordinate locations. %DJIA MisPrc is the natural logarithm
of the ratio of the respondent estimated, intrinsic level of the DJIA to the average, actual DJIA level over the
previous week of the response date. TooHigh(TooLow) takes the value one if the respondent answers that actual
prices in the stock market are too high (too low) relative to fundamentals. DJIA TooHigh (DJIA TooLow) takes
the value one if the %DJIA MisPrc for a respondent is above the 75th percentile (below the 25th percentile) of
the overall sample. Investor BSI is the daily total, net buy minus sell dollar volume, scaled by the total dollar
trading volume within the same ZIP code. StockInvestor BSI is the daily total, buy minus sell dollar volume for
the same ZIP code and stock, scaled by the total dollar trading volume within the same stock. StockDSKC is the
difference between the average SKC of institutional investors holding the same stock, less its seasonal value.
%IO is the proportion of shares in the stock held by institutional investors. PosRetis an indicator variable that
takes the value one if the stock experiences positive returns for that date and zero otherwise.
the two-week window (0.263) and is relatively stable when using a four-week
window (0.223).
Panel B describes the primary variables used in the survey-based tests.
The binary response variables are displayed in the first four rows. In our
sample, slightly more investors indicate that stock prices are generally too high
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(19.5%) than too low (14.8%) relative to fundamentals. By construction, the

DJIATooHigh and DJIATooLow variables have a sample mean of approximately
25%. The volatility of daily DJIA returns over the past 30 days is represented
in points.
Panel C provides descriptions on the trade sample. The DSKC measure is
constructed over the trade sample and has a lower sample mean and standard
deviation than those calculated over the survey sample. The Investor and
StockInvestor BSI ratios are slightly positive in the sample period.
Finally, panel D provides statistical descriptions on the holdings sample. The

changes in stock-level DSKC measures have a lower sample mean than either
the survey or trade data samples. The sample standard deviations slightly half
of the size less than that of the DSKC in the trade sample, which in part is due
to averaging DSKC in stocks with a larger number of investors.
3. Weather-Induced Mood and Perceived Mispricing

The social psychology literature provides evidence that individuals provide
mood-congruent assessments on objects unrelated to the cause of their affective
states (Cunningham 1979; Schwarz and Clore 1983). In particular, Schwarz and
Clore (1983) find that sunny days are associated with relatively more optimistic
assessments. Recent experimental evidence also shows that weather conditions
can influence risk attitudes through its impact on mood (Bassi, Colacito, and
Fulghieri 2013).
In this section, we analyze the survey data where institutional investors
are asked a series of questions related to their opinions on stock market
investment. Our tests focus on perceived investor mispricing. Investors may
view stocks as mispriced for a variety of reasons. While risk preferences across
professional investors may be relatively homogenous, variation in weather
patterns may generate mood-induced biases in investor beliefs about underlying
fundamentals. In turn, its impact on beliefs may also affect their trading
decisions, which we examine on trade data in subsequent tests. Because the
survey does not draw attention to weather conditions during the interview,
we view the analysis as a field experiment where deseasonalized weather
conditions are randomly assigned to subjects.
3.1 Univariate estimates

Table 2 presents the Pearson correlation coefficients amongst the variables
used in the regression models.25 Panel A presents the results for the dependent
variables and the conditioning variables. Panel B presents the results for
the dependent variables and deseasonalized SKC measured over different
estimation windows, defined similarly to panel A of Table 1. The correlation
coefficients are accompanied with p−values, and are displayed in parentheses.
25 The results are similar using nonparametric tests, such as rank-order correlations.
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Table 2
Pearson correlation matrix of survey and weather variables
Panel A: Survey responses with conditioning variables
%DJIA DJIA DJIA
TooHigh TooLow MisPrc TooHigh TooLow
TooLow −20.55%
(0.000)
%DJIAMisPrc −58.55% 27.21%
(0.000) (0.000)
DJIATooHigh 67.80% −19.93% −72.42%
(0.000) (0.000) (0.000)
DJIATooLow −25.22% 41.96% 53.71% −33.84%

(0.000) (0.000) (0.000) (0.000)
DJIA volatility −0.42% 4.25% 6.65% −0.65% 11.00%
(0.872) (0.099) (0.010) (0.801) (0.000)
Portfolio size 2.23% 0.65% 3.06% −0.28% 2.37%
(0.388) (0.802) (0.235) (0.912) (0.359)
Growth rate −9.43% 3.55% 3.54% −3.96% 4.63%
(0.000) (0.169) (0.170) (0.124) (0.073)
Population 3.62% 2.01% −1.87% 2.85% −2.30%
(0.160) (0.437) (0.470) (0.269) (0.372)
Median income 1.20% −2.01% −2.03% 0.43% −4.80%
(0.643) (0.435) (0.432) (0.866) (0.063)
Change in population −0.41% 0.82% 0.38% 0.03% 1.65%
(0.874) (0.752) (0.883) (0.990) (0.522)
Change in median income −0.95% 0.65% −1.41% −3.14% −4.52%
(0.712) (0.801) (0.585) (0.223) (0.079)
SAD −0.43% −3.88% −2.20% −1.32% −3.50%
(0.869) (0.132) (0.394) (0.609) (0.175)
Panel B: Survey responses with deseasonalized SKC (DSKC)
DSKC estimation window
1 day 3 days 1 week 2 weeks 1 month
TooHigh 2.25% 2.60% 1.70% 4.74% 4.95%
(0.382) (0.314) (0.510) (0.066) (0.055)
TooLow 0.73% 2.06% 2.59% 2.04% 2.00%
(0.778) (0.424) (0.316) (0.430) (0.438)
%DJIA MisPrc −1.88% −2.81% −2.98% −5.93% −5.22%
(0.466) (0.276) (0.248) (0.022) (0.043)
DJIA TooHigh 2.35% 3.14% 4.28% 7.46% 6.83%
(0.362) (0.223) (0.097) (0.004) (0.008)
DJIA TooLow 1.59% −2.23% −3.16% −3.91% −3.56%
(0.537) (0.387) (0.221) (0.130) (0.168)
The table presents the Pearson correlation coefficients between the mispricing measures and the conditioning
variables in the regression models of Table 3 (panel A) and between the mispricing measures and the
deseasonalized cloud cover (DSKC) measures across the estimation windows (panel B). The mispricing measures
are TooHigh, TooLow, %DJIA MisPrc, DJIA TooHigh, and DJIA TooLow. The estimation windows for the DSKC
measures are 1 day, 3 days, 1 week, 2 weeks, and 1 month. p−values on the correlation coefficients are reported
in parentheses.
In panel A of Table 2, the correlation coefficients amongst the survey

variables related to mispricing suggest internal consistency in the responses.
The correlation between TooHigh and DJIATooHigh is 67.8% (p-value <0.001),
and both are strongly, negatively associated with the TooLow, DJIATooLow, and
%DJIAMisPric measures, respectively.
We next examine how other variables correlate with the mispricing measures.
The volatility of DJIA returns has a positive and statistically significant
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correlation with measures related to perceived underpricing, and the correlation

coefficient is higher with the DJIATooLow measure. The long-term corporate
earnings growth rate estimates are signed consistently with received wisdom,
though only the DJIATooLow correlation is statistically significant. Portfolio
size does not have a statistically significant correlation coefficient with
any of the mispricing measures. Neither levels nor changes in the county-
level characteristics appear to be consistently correlated with the mispricing
measures.
In panel B, the correlation coefficients between the mispricing measures

and the DSKC are not statistically significant when using estimation windows
of less than one week. When expanding the estimation windows to two
weeks and beyond, the correlation coefficients become statistically significant
for TooHigh, %DJIAMisPrc and DJIATooHigh. Both the TooHigh and
DJIATooHigh coefficients are positive, while the %DJIAMisPrc coefficient
is negative, as expected. Additionally, the DJIATooHigh coefficient is
considerably larger than that of TooHigh. Finally, the correlation coefficients
that use TooLow and DJIATooLow remain statistically insignificant, however,
and only DJIATooLow has the predicted sign. Again, we cannot observe the
criteria investors use to assess what is “too” high or low in the TooHigh and
TooLow measures, respectively. In contrast, the DJIATooLow measure uses
consistent criteria that we define, and so may explain differences in the signs
between the two coefficients.
These results raise some interesting questions. First, the relation between
the coefficients and the length of the DSKC estimation window may be due to
measurement error. The respondent may take more than one day to fill out the
survey, so that the relevant estimation window for the DSKC measure may be
larger than just the day the survey was completed. Using this interpretation,
the results would suggest that the respondent may have taken more than two
weeks to ponder the survey questions, which does not appear to be plausible.
On the other hand, investors may rely on information that has already been
collected over time to determine their responses. The DSKC measure using
longer estimation windows may better correspond with the composite affective
reaction for the periods over which the relevant information is collected.
Additionally, the results are also consistent with findings from clinical studies on
light therapy and nonseasonal depression, showing that antidepressant benefits
of simulated sunlight take hold only after repeated exposure over long treatment
periods.
Second, while the correlation coefficients are large and statistically
significant for the overpricing measures, the coefficients are statistically
insignificant on the underpricing measures. An alternative interpretation of the
findings on the TooHigh measure is that deseasonalized sunshine is positively
related to responses of “too low” or “just right”. Bad moods may induce
individuals to examine information with greater scrutiny (Schwartz 1990;
Petty, Gleicher, and Baker 1991), so that good moods may not necessarily
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result in bullish responses over non-critical ones. The lack of statistically

significant results associated with the TooLow measure is consistent with this
interpretation. A similar pattern holds for the DJIATooHigh and DJIATooLow
results.
These findings suggest that longer estimation windows used to construct
the cloud cover measures may be important to capture mood effect on the
mispricing measures. For the remainder of the analysis, we include only DSKC
measured over a two-week estimation window given our findings from Table 2,
and are consistent with the clinical studies discussed in Section 1. We next

determine the robustness of the univariate results by conditioning on other
factors that may also impact the survey responses.
3.2 Perceived mispricing regression specification

The OLS regression models of perceived mispricing are specified as follows:
Yi,t = b0 +b∗1 DSKCi,t +b∗Xi,t +εi,t
The dependent variables in the regression models are TooHigh, TooLow,

%DJIAMisPrc, DJIATooHigh, and DJIATooLow. DSKC i,t is constructed as
a 14-day rolling average using information up to date tof zip code-level cloud
cover. Xi,t represents a vector of other explanatory variables for respondent i
at date t.
We include the following conditioning variables in the models. First, proxies
for local economic conditions are included, such as county-level population,
changes in population, county-level median income, and changes in median
income. This choice is motivated by the evidence in Coval and Moskowitz
(1999) document local bias in investment choices of institutional investors.
Economic conditions may affect the future prospects of local investment
opportunities, which in turn may influence investor opinions on stock market
investment.
Second, professional investors with greater assets under management may
have systematically different opinions about equity market investment, and
so the natural logarithm of one plus the size of the respondent’s investment
portfolio is included in the models. Third, large, recent fluctuations in stock
prices may also influence responses, as periods of greater equity market
volatility may negatively bias the responses. Accordingly, the natural logarithm
of the sample volatility of the DJIA index returns over the past 30 days is
included as a conditioning variable. Fourth, the respondent’s estimate of the
long-term corporate earnings growth is also included, as it may systematically
influence the mispricing measures. Finally, we also include the SAD measure
used in Kamstra, Kramer, and Levi (2003) to further distinguish from seasonal
effects on mood.
For the binary dependent variables, the test coefficients may be influenced
by the functional form of the estimator. To assess its effect, we also estimate
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the models using a probit estimator, which takes the form:

P(Yi,t |Zi,t ) = (Zi,t )
Here, Y represents the binary variables associated with perceived mispricing,
and Zi,t = c0 +c1 ∗DSKCi,t +c∗Xi,t . As with the OLS specifications, the
residuals across time and region are unlikely to be uncorrelated, biasing
downward the standard error estimates. To address these issues, only two-way
clustered standard errors on the zip code- and date-levels are reported.26

3.3 Perceived mispricing regression estimates
Table 3 presents the estimates. Panel A presents the OLS model estimates from
all the mispricing models. Panel B presents the probit model estimates using
only the binary dependent variables. Only marginal effects are reported in panel
B to facilitate comparison with the OLS estimates.
Panel A shows that the OLS coefficients on DSKC are consistent with the
univariate results, even after inclusion of the conditioning variables. The DSKC
coefficient in model 1 is positive and statistically significant (estimate = 0.073,
t-value = 1.87). In other words, higher deseasonalized cloud cover increases
the likelihood that investors believe that stock prices are “too high” relative to
fundamentals. When DSKC is replaced by SKC and Seasonal SKC in model
2, similar results obtain: the SKC coefficient is 0.087 (t-value = 2.25), while
the Seasonal SKC coefficient is statistically insignificant (estimate = −0.039,
t-value = −0.73).
In contrast, the DSKC coefficient in the TooLow model is not statistically
significant (estimate = 0.029, t-value = 0.89). The DSKC coefficient in the
%DJIAMisPrc model is negative (estimate = −0.025, t-value = −2.14), and
shows that deseasonalized cloud cover decreases the continuous measure of
perceived underpricing. However, most of the explanatory power of DSKC
appears to be driven by responses associated with overpricing. The DSKC
coefficient in the DJIATooHigh model is 0.120 (t-value = 3.04), while that of
the DJIATooLow model is −0.045 (t-value = −0.84). The coefficients on the
conditioning variables are statistically insignificant for the most part, and their
signs are consistent with the univariate results from panel A of Table 2.
We next repeat the analysis using probit estimators. The results are reported
in panel B, and are quite similar. The marginal effect of DSKC in the TooHigh
model is slightly larger (estimate = 0.079, z-value = 1.94), and the result is
similar in the DJIATooHigh model (estimate = 0.125, z-value = 3.07). To
assess the economic magnitudes, a one-standard-deviation increase in DSKC
translates to an increase of 0.021 and 0.033 in TooHigh and DJIATooHigh and
represents 10.6% and 13.1% of the sample means, respectively.
26 The standard error adjustments are performed using Jonah Gelbach and Douglas Miller’s STATA code
(cgmreg.ado), which is based on the procedures described by Cameron, Gelbach, and Miller (2011). Our estimates
are identical for the two-way clustering cases in which we use Mitchell Petersen’s STATA code (cluster2.ado).
This procedure is described by Petersen (2009).
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92
Table 3
OLS regression models on survey responses
[10:36 8/12/2014 RFS-hhu063.tex]

Panel A: OLS regressions
Dependent variable
TooHigh TooLow %DJIA MisPrc DJIA TooHigh DJIA TooLow
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
DSKC 0.073∗ 0.029 −0.025∗∗ 0.120∗∗∗ −0.045
(0.039) (0.033) (0.012) (0.040) (0.053)
SKC 0.087∗∗ 0.035 −0.031∗∗ 0.139∗∗∗ −0.046
(0.039) (0.037) (0.012) (0.040) (0.055)
Seasonal SKC −0.039 −0.014 0.008 −0.075 0.043
(0.053) (0.039) (0.013) (0.054) (0.062)
DJIA Vol 0.002 −0.003 0.055 0.053 0.031 0.034∗ −0.011 −0.018 0.204∗∗∗ 0.205∗∗∗
(0.056) (0.055) (0.052) (0.052) (0.020) (0.020) (0.065) (0.065) (0.074) (0.075)
Portfolio size 0.001 0.001 0.000 0.000 0.001 0.001 −0.001 −0.001 0.002 0.002
(0.002) (0.003) (0.002) (0.002) (0.001) (0.001) (0.002) (0.002) (0.002) (0.002)
Growth rate −5.894∗∗∗ −5.908∗∗∗ 1.889 1.883 0.696 0.703 −2.731 −2.749 3.123∗ 3.124∗
(1.441) (1.453) (1.412) (1.415) (0.807) (0.811) (1.837) (1.854) (1.875) (1.876)
Population 0.011 0.010 0.008 0.008 −0.001 −0.001 0.010 0.009 −0.002 −0.001
(0.009) (0.010) (0.008) (0.008) (0.003) (0.003) (0.009) (0.009) (0.010) (0.009)
Income −0.004 −0.014 −0.050 −0.054 −0.005 0.000 0.010 −0.002 −0.049 −0.048
(0.047) (0.048) (0.038) (0.039) (0.015) (0.015) (0.053) (0.053) (0.042) (0.044)
Population change −0.121 0.001 0.222 0.274 −0.007 −0.065 −0.279 −0.117 0.012 0.006
(0.393) (0.385) (0.336) (0.356) (0.123) (0.132) (0.441) (0.434) (0.395) (0.414)
Income change −0.270 −0.174 0.334 0.375 −0.020 −0.065 −0.736 −0.610 −0.377 −0.382
(0.514) (0.520) (0.403) (0.413) (0.161) (0.170) (0.568) (0.569) (0.496) (0.521)
SAD 0.003 −0.001 −0.006 −0.008 −0.000 0.002 −0.003 −0.009 0.007 0.007
(0.012) (0.013) (0.011) (0.012) (0.004) (0.004) (0.014) (0.016) (0.020) (0.021)
N 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505
Adjusted R 2 1.374% 1.463% 0.629% 0.649% 1.074% 1.290% 1.020% 1.149% 1.917% 1.917%
Page: 92
(continued)
73–111
Table 3
Continued
Panel B: Probit regressions
Dependent variable
TooHigh TooLow TooHigh DJIA TooLow DJIA
(1) (2) (3) (4) (5) (6) (7) (8)
[10:36 8/12/2014 RFS-hhu063.tex]

DSKC 0.079∗ 0.031 0.125∗∗∗ −0.042
(0.041) (0.034) (0.041) (0.052)
SKC 0.094∗∗ 0.037 0.146∗∗∗ −0.042
(0.041) (0.039) (0.042) (0.054)
Seasonal SKC −0.046 −0.017 −0.078 0.043
(0.054) (0.039) (0.055) (0.061)
DJIA vol 0.003 −0.001 0.054 0.052 −0.013 −0.020 0.203∗∗∗ 0.202∗∗∗
(0.056) (0.055) (0.050) (0.050) (0.066) (0.065) (0.073) (0.073)
Portfolio size 0.001 0.001 0.000 0.000 0.000 0.000 0.002 0.002
(0.003) (0.003) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
Growth rate −10.622∗∗ −10.518∗∗ 1.790 1.781 −2.903 −2.877 2.868∗ 2.867∗
(5.150) (5.142) (1.146) (1.149) (2.108) (2.110) (1.613) (1.614)
Population 0.011 0.010 0.008 0.007 0.011 0.009 −0.001 −0.001
(0.009) (0.010) (0.008) (0.008) (0.009) (0.009) (0.009) (0.009)
Income −0.009 −0.017 −0.050 −0.054 0.010 0.000 −0.047 −0.047
(0.048) (0.049) (0.039) (0.040) (0.053) (0.053) (0.044) (0.045)
Population change −0.071 0.069 0.219 0.279 −0.199 0.021 0.174 0.179
(0.426) (0.428) (0.361) (0.394) (0.540) (0.591) (0.619) (0.642)
Income change −0.207 −0.124 0.329 0.371 −0.757 −0.649 −0.469 −0.467
(0.527) (0.536) (0.411) (0.421) (0.580) (0.590) (0.530) (0.549)
SAD 0.004 −0.000 −0.007 −0.008 −0.003 −0.009 0.006 0.006

(0.012) (0.013) (0.012) (0.012) (0.015) (0.016) (0.020) (0.021)
N 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505
Pseudo R 2 1.767% 1.860% 0.643% 0.654% 0.873% 0.979% 1.636% 1.638%
The table reports the coefficients using OLS regression model (panel A)
Yi,t = b0 +b1 DSKCi,t +b2 DJ I AV olt +b3 P ortf olioSizei.t +b4 GrowthRatei,t +b5 P opulationi,t +b6 P opulationChangei,t +b7 I ncomei,t +b8 I ncomeChangei,t +b9 SADi,t +εi,t ,
and using probit regression model (panel B)
P(Yi,t |Zi,t ) = (Zi,t ),
where Zi,t = b0 +b1 DSKCi,t +b2 DJ I AV olt +b3 P ortf olioSizei.t +b4 GrowthRatei,t +b5 P opulationi,t +b6 P opulationChangei,t +b7 I ncomei,t +b8 I ncomeChangei,t +b9 SADi,t .
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Odd number models replace DSKC with SKC and Seasonal SKC. Panel B reports marginal effects from the probit models. The dependent variables (Y) in the models are reported in the top of
93
each column and include a binary variable associated with whether individual stocks are perceived to be overpriced (TooHigh), a binary variable associated with whether individual stocks are
perceived to be underpriced (TooLow), the percentage difference between the perceived DJIA level relative to a 7-day trailing average of the actual DJIA level (%DJIA MisPrc), a binary variable
associated with whether %DJIA MisPrc is in the bottom sample quartile (DJIA TooHigh), and a binary variable associated with whether %DJIA MisPrc is in the top sample quartile (DJIA
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TooLow). Only binary dependent variable models are estimated in panel B. Robust standard errors clustered on ZIP code and date levels are reported in parentheses below. ***, **, and * denote
statistical significance at the 1%, 5%, and 10% levels, respectively.
3.4 Perceived mispricing regression estimates: Robustness checks

One concern with the estimates in Table 3 is that they are susceptible to
omitted variable biases that may be driven by seasonal or interregional factors.
While the DSKC measure is constructed to purge seasonal variation, the
seasonal adjustments may be insufficient so that time effects may overstate
the effect of DSKC. Interregional factors invariant of time may also overstate
the effect of DSKC, so that the results may be driven by a limited number of
regions.
To assess the impact of these potential biases, we re-estimate the models from

Table 3 after including state (panel A) or year-quarter (panel B) fixed effects,
which should decrease the statistical power of the tests. Because of sample
size limitations, using regional and time variables with greater granularity is
infeasible. Finally, because of the inclusion of these fixed effects, we only
estimate the models using OLS estimators, given the well-known, incidental
parameters issues associated with fixed effect probit estimators.
In panel A, we show that the results from the state fixed effects models are
similar to those in Table 3. All models include the conditioning variables from
the models in Table 4, though the coefficients are not reported to conserve space.
In the TooHigh model, the DSKC coefficient remains positive but becomes
statistically insignificant at the 10% level (estimate = 0.067, t-value = 1.64).
However, the SKC coefficient remains positive and statistically significant
(estimate = 0.105; t-value = 2.54). The DSKC coefficients remain statistically
significant in the %DJIAMisPrc (estimate = −0.021; t-value = −1.85) and
DJIATooHigh (estimate = 0.112; t-value = 2.61) models. The DSKC coefficients
are statistically insignificant for the TooLow and DJIATooLow models. The
results for the SKC coefficients are similar. Altogether, the estimates are slightly
smaller in absolute magnitude than those in Table 3, though most remain
statistically significant.
Similar results obtain for the year-quarter fixed effects models in panel
B. In the TooHigh model, the DSKC coefficient is positive and statistically
significant (estimate = 0.066; t-value = 1.69), as is the SKC coefficient (estimate
= 0.068; t-value = 1.77). The DSKC coefficient in the %DJIAMisPrc model
remains negative but statistically insignificant at the 10% level (value = −0.017;
t-value = −1.54), though the SKC coefficient is statistically significant (estimate
= −0.020; t-value = −1.73). The DSKC coefficient in the DJIATooHigh model
is positive and statistically significant (estimate = 0.093; t-value = 2.65). As
with the state fixed effects models, the DSKC coefficients are statistically
insignificant for the TooLow and DJIATooLow models.
Finally, we consider interaction terms in the perceived mispricing models
related to DSKC and SAD. Because cloud cover is also negatively related to
sunlight exposure, which, in the clinical literature, has been documented to
be associated with seasonal affective disorder, it is plausible that cloud cover
may amplify the effects of daylight on individual mood. We find that SAD
coefficients across all the models we estimate are statistically insignificant at
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Table 4
Fixed effects regression estimates using the survey data
Dependent variable
%DJIA DJIA DJIA
[10:36 8/12/2014 RFS-hhu063.tex]

TooHigh TooLow MisPrc TooHigh TooLow
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Panel A: State fixed effects
DSKC 0.067 0.017 −0.021∗ 0.112∗∗∗ −0.026
(0.041) (0.035) (0.011) (0.043) (0.049)
SKC 0.105∗∗ 0.012 −0.033∗∗∗ 0.148∗∗∗ −0.033
(0.042) (0.041) (0.013) (0.046) (0.053)
Seasonal SKC 0.010 −0.028 −0.002 −0.040 0.012
(0.055) (0.043) (0.012) (0.057) (0.060)
Conditioning variables yes yes yes yes yes yes yes yes yes yes
N 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505
Adjusted R 2 1.035% 1.360% −0.527% −0.588% 0.034% 0.362% −0.362% −0.142% 1.803% 1.747%
Panel B: Year-quarter fixed effects
DSKC 0.066∗ 0.038 −0.017 0.093∗∗∗ 0.007
(0.039) (0.032) (0.011) (0.035) (0.049)

SKC 0.068∗ 0.054 −0.020∗ 0.098∗∗∗ 0.010
(0.039) (0.036) (0.011) (0.035) (0.051)
Seasonal SKC −0.060 0.001 0.009 −0.082 0.001
(0.053) (0.037) (0.013) (0.050) (0.058)
N 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505 1,505
Adjusted R 2 1.822% 1.758% 0.496% 0.559% 2.298% 2.277% 2.604% 2.546% 4.880% 4.819%
The table reports the coefficients of the regression model:
Yi,t = b0 +b1 DSKCi,t +b2 DJ I AV olt +b3 P ortf olioSizei.t +b4 GrowthRatei,t +b5 P opulationi,t +b6 P opulationChangei,t +b7 I ncomei,t +b8 I ncomeChangei,t +b9 SADi,t +ςi +τt +εi,t .
The dependent variables, Y , include TooHigh, TooLow, %DJIA MisPrc, DJIA TooHigh, and DJIA TooLow. Models 6 through 10 of each panel replace DSKC with SKC and Seasonal SKC. The
regression models in panel A include state fixed effects, and in Panel B, they include year-quarter fixed effects. The estimates on the conditioning variables are not shown to conserve space.
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Robust standard errors clustered on the ZIP code and date levels are reported in parentheses below. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
95
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the 10% level, and we posit that the lack of variation in nighttime hours in our
data sample may be the explanation.
To evaluate these views, we include DSKC and SAD interaction terms in the
OLS models from Table 3, and the results are displayed in Table A.1 in the
Online Appendix. The DSKC coefficient remains statistically significant for
the TooHigh, %DJIA MisPrc, and DJIA TooHigh models. In these models, the
interaction term coefficients are of consistent sign as our conjecture, though
only the one in the TooHigh model is statistically significant at the 10% level.27
We conclude, as before, that the tests may not have sufficient statistical power

given the lack of variation in the number of nighttime hours in our sample and
leave further tests to future research.
4. Weather-Induced Mood and Institutional Investor Trading

The results from the previous section show that DSKC has a strong impact on
perceived mispricing among institutional investors and imply that DSKC may
also impact trading behavior. We evaluate this channel by constructing tests
using daily institutional investor trades from the ANcerno database. Positive
(negative) trade imbalances relate to institutional investors that are net buyers
(sellers) for an observation date. The daily trade data are aggregated to the
ZIP code level and are used to construct the Investor and StockInvestor BSI
measures. DSKC is constructed identically to the procedure described in the
survey-based tests.
4.1 Mood and trading behavior: Univariate results

We begin by using paired t-tests to assess whether Investor BSI is systematically
higher on sunny relative to cloudy regions across time. We define sunny
(cloudy) regions based on whether DSKC for a particular investor is in the
top (bottom) xth percentile of the sample for each date. The paired t-tests
assess the statistical significance of the difference in group means of Investor
BSI across sunny and cloudy regions conditional upon x. We estimate cases in
which x takes on values of 50, 33, 25, and 10, respectively. For example, when
x = 10, the paired t-test assesses the difference in group means of Investor
BSI across investors in the top and bottom 10th percentile. In this manner, we
are able to verify whether the difference in the group means increases using
relatively more extreme DSKC values.
Table 5 displays the results. The thresholds used to define the investor groups
are displayed in the first column. The average Investor BSI for the cloudy and
sunny groups is displayed in Columns 2 and 3, respectively. The difference
in the group means is displayed in the fourth column. The differences are
accompanied by their standard errors and are displayed in parentheses.
27 The results are similar with the inclusion of a dummy variable corresponding with fall months.
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Table 5
Univariate analysis of high-low DSKC on investor BSI
High DSKC Low DSKC High DSKC - Low DSKC
50th percentile split 0.021 0.034 −0.013∗∗∗ (0.003)
33rd percentile split 0.018 0.037 −0.018∗∗∗ (0.004)
Group sample averages of the Investor BSI are reported for high and low DSKC investors. Investor BSI is defined
as the total dollar buy less sell volumes, scaled by the total trading volume for ZIP-code i and date t . Investors
are ranked based on DSKC for each date. High (low) DSKC investor classification is based on whether the DSKC
ranking is in the top (bottom) 50th, 33rd, 25th, or 10th percentile of that date. Standard errors on the difference

in the group means are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and
10% levels, respectively.
When defining the groups by the top (bottom) 50th percentile on DSKC for
each sample date, the difference in Investor BSI is negative and statistically
significant (estimate = −0.013; t-value = −3.71), as expected. Tightening
the threshold serves to increase the group differences and appears to be
primarily driven by increasing values of average Investor BSI in the sunny
groups. For cloudy (sunny) groups based on the top (bottom) 10th percentile
on DSKC, the difference in the group means is −0.046 (t-value = −5.48),
which is approximately 9.2% of the sample standard deviation for Investor
BSI. Altogether, these univariate tests show that DSKC has a negative impact
on investor propensities to buy, as predicted. Additionally, the effect becomes
pronounced when tightening the thresholds for the DSKC groupings.
4.2 Multivariate BSI regression specification

Next, we assess the robustness of the univariate results by using panel
regression models to condition variation related to cross-sectional and time-
series determinants of Investor BSI. The model estimated over the full sample
is specified as follows:
Investor BSIz,t = d0 +d1 ∗DSKCz,[t−14,t] +d∗Wz,t +εz,t .
For ZIP code z and date t, Wz,t represents a vector of variables that allows
us to isolate the source of the explanatory power of DSKC in the models.
The times-series variables include dummy variables for whether the sample
date is in January or on a Monday, as done by Goetzmann and Zhu (2005),
and the SAD measure, which is constructed using the ZIP code of the trading
institution’s location. As with the survey-based tests, we also control for county-
level economic variables based on the institution’s location. Finally, we also
exploit within-ZIP code and within-date variation in the DSKC variable through
inclusion of fixed effects as robustness checks after presenting the results on
the baseline models. Table 6 displays the estimates from these models.
In the results reported in Table 7, the dataset is disaggregated further into a
three-level panel, where the data is represented on the ZIP code (z), date (t),
and stock (j ) level. The dependent variable of those models is StockInvestor
BSI. Additionally, unlike the Investor BSI measure, because the dataset does
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Table 6
Regression analysis on daily ZIP code-level investor BSI
Dependent variable: Investor BSI ratio
(1) (2) (3) (4) (5) (6)
DSKC −0.024∗∗ −0.021∗∗ −0.031∗∗
(0.011) (0.010) (0.014)
SKC −0.023∗∗ −0.020∗∗ −0.031∗∗
(0.010) (0.010) (0.014)
Seasonal SKC −0.029 −0.059∗∗ 0.017
(0.057) (0.026) (0.070)
Monday −0.014∗∗ −0.014∗∗ −0.014∗∗ −0.014∗∗
(0.006) (0.006) (0.006) (0.006)

January 0.008 0.009 0.007 0.009
(0.012) (0.012) (0.012) (0.012)
SAD −0.003 −0.003 −0.002 −0.001 −0.091∗∗ −0.085∗
(0.003) (0.003) (0.003) (0.003) (0.042) (0.051)
Population 0.001 0.001 0.508 0.507 −0.004 −0.003
(0.017) (0.017) (0.400) (0.399) (0.016) (0.017)
Income −0.005 −0.003 −0.039 −0.039 −0.005 −0.004
(0.023) (0.023) (0.052) (0.052) (0.023) (0.023)
Population change −0.764 −0.971 0.370 0.377 −1.995∗ −2.045∗
(0.962) (0.915) (0.824) (0.823) (1.137) (1.073)
Income change −0.009 −0.016 0.060 0.059 −0.174 −0.174
(0.089) (0.087) (0.093) (0.093) (0.170) (0.169)
N 88,246 88,246 88,246 88,246 88,246 88,246
Adjusted R 2 0.034% 0.050% 1.523% 1.546% 1.703% 1.703%
ZIP code FEs yes yes
Date FEs yes yes
The table reports panel regression estimates using a daily ZIP code-level institutional buy-sell imbalance ratio
(Investor BSI) as the dependent variable:
I nvestorBSIz,t = d0 +d1 DSKCz,t +d2 Mondayt +d3 J anuaryt +d4 P opulationz,t +d5 P opulationChangez,t
+d6 I ncomez,t +d7 I ncomeChangez,t +d8 SADz,t +ξz +ηt +εz,t .
Investor trades are aggregated to the date-ZIP code level. The explanatory variables of interest are the natural
logarithm of one plus the average SKC over the past 14 days (SKC), the natural logarithm of one plus the average
SKC over the same month over the entire sample period (Seasonal SKC), and the deseasonalized SKC defined
as the difference between SKC and Seasonal SKC (DSKC). Though not displayed, some of the models include
additional explanatory variables, as indicated. Monday takes the value of one if the observation date is a Monday
and zero otherwise. January takes the value of one if the observation month is January and zero otherwise.
County economic condition variables are as follows. Population is the logarithm of the county-level population.
PopulationChange is the change over the previous year. Income is the logarithm of the county-level median
household income. IncomeChange is the change in Income over the previous year. Adjusted nighttime hours per
day (SAD) is calculated using the construction outlined by Kamstra, Kramer, and Levi (2003), based upon the
investors coordinate locations. Models 3 and 4 include ZIP code fixed effects (ξ ), and models 5 and 6 include
date fixed effects (η). Coefficients on the fixed effects are not reported for viewing ease. Robust standard errors
clustered on date and ZIP code levels are reported in parentheses. ***, **, and * denote statistical significance
at the 1%, 5%, and 10% levels, respectively.
not reveal the investor’s daily positions, the tests are conditional on whether
the investor trades (e.g., either buys or sells) in the stock for a particular date.
The advantage of the three-level panel is that we can now account for stock-
level factors. Specifically, we include in the regression models individual stock
characteristics related to size, which is measured as the natural logarithm
of the stock’s market capitalization, and liquidity, which is measured as the
inverse of the stock’s share price. We also examine another specification that
includes fixed effects for each stock-date pair, which is expected to significantly
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[10:36 8/12/2014 RFS-hhu063.tex]
Table 7
Regression analysis on daily ZIP code-stock-level investor BSI
Dependent variable: StockInvestor BSI
(1) (2) (3) (4) (5) (6) (7) (8)
DSKC −0.008∗ −0.007∗∗ −0.010∗∗ −0.007∗∗∗
(0.005) (0.003) (0.004) (0.003)
SKC −0.008∗ −0.007∗∗ −0.009∗∗ −0.006∗∗
(0.005) (0.003) (0.004) (0.003)
Seasonal SKC 0.014 0.013 0.056∗∗ 0.035∗∗∗
(0.028) (0.013) (0.028) (0.013)
Conditioning variables YES YES YES YES
N 13,324,507 13,324,507 13,324,507 13,324,507 13,324,491 13,324,491 13,324,491 13,324,491
Adjusted R 2 0.001% 0.001% 52.530% 52.530% 0.283% 0.289% 52.535% 52.536%
Date and stock FEs yes yes yes yes
This table reports OLS regression model estimates using the daily stock/investor-level BSI ratio (StockInvestor BSI) as the dependent variable:
StockI nvestorBSIz,j,t = f0 +f1 DSKCz,t +f2 Mondayt +f3 J anuaryt +f4 P opulationz,t +f5 P opulationChangez,t +f6 I ncomez,t +f7 I ncomeChangez,t
+f8 SADz,t +f9 MktCapj,t +f10 StockLiqj,t +ϕj,t +εz,j,t.
Investor trades are aggregated to the stock-date-ZIP code level. Though not displayed, some of the models include additional explanatory variables, as indicated. Models (1) through (4)
include fixed effects based on date groups. Models (5) through (6) include fixed effects based on date-stock grouping pairs (φ). Robust standard errors clustered on the stock, date, and ZIP
code levels are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
Page: 99
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decrease the statistical power of the tests. The fixed effects models limit the
variation in DSKC to within-stock-date groupings, purging the estimators of
any unobservable factors associated with a particular stock at each point in time.
The fixed effects model described above is specified as follows:
StockInvestor BSIz,j,t = f0 +f1 ∗DSKCz,t +f2 ∗CountyCharacteristcsz,t

+f3 ∗SADz,t + fj,t ∗D(Stock = j Date = t)+εz,j,t .
j t
The fixed effects model does not include a number of variables that are

subsumed by the fixed effects terms, such as the stock characteristics and the
time-series variables. Because the residuals in the three-level panel model are
unlikely to be independent across the panel dimensions, the reported standard
errors in the tables are adjusted for three-way clustering at the ZIP code, date,
and stock levels.
4.3 Investor trading model estimates

The analysis proceeds by estimating the Investor BSI models. As shown in
Table 6, models 1 and 2 represent the estimates without the fixed effects. Models
3 and 4 include ZIP code fixed effects. Models 5 and 6 include date fixed
effects. The odd-numbered models provide estimates on DSKC, whereas the
even-numbered models show estimates on SKC controlling for Seasonal SKC.
In model 1, the DSKC coefficient is negative and statistically significant
(estimate = −0.024; t-value = −2.25), and the SKC coefficient in model 2
is also negative and statistically significant (estimate = −0.023; t-value =
−2.25). Among the conditioning variables, only the Monday dummy variable is
negative and statistically significant. When including the ZIP code fixed effects
in models 3 and 4, the results are similar. The DSKC coefficient remains stable
(estimate = −0.021; t-value = −2.03) relative to the estimates in model 1.
Finally, similar results obtain when we include date fixed effects, though the
DSKC coefficient is slightly higher (estimate = −0.031; t-value = −2.28). The
Monday and January dummy variables are dropped from the model, as they
are subsumed by the date fixed effects.
Because the DSKC measure is constructed in an overlapping manner given
the panel data structure, one possible concern is that the standard error estimates
are inconsistent, due to autocorrelated residual terms. We re-estimate the
standard errors for the model coefficients from Table 6 using the procedure
described by Driscoll and Kraay (1998), which accounts for serial and cross-
sectional dependency in the regression residuals. The results are reported in
Appendix Table A.2 and are similar to those in Table 6.
Table 7 presents the estimates for the StockInvestor BSI models. Models 3,
4, 7, and 8 include the stock-date fixed effects, whereas models 5 through 8
also include the other conditioning variables. The DSKC coefficient estimate
in model 1 is negative and statistically significant (value = -0.008; t-value =
−1.79). When we include fixed effects in model 3, the adjusted R 2 increases
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dramatically, from 0.001% to 52.530%. However, the DSKC coefficient

remains stable and statistically significant (estimate = −0.007; t-value =
−2.34), suggesting that the explanatory power of DSKC on StockInvestor BSI
is not affected by stock-date factors. When including the control variables in
model 7, the DSKC coefficient estimate remains similar (estimate = −0.007;
t-value = −2.60). Finally, the results are similar when we replace DSKC with
SKC and Seasonal SKC. Overall, our trading regression results are remarkably
robust even when accounting for stock related factors.
In summary, consistent with our predictions, we find that mood as measured

by cloud cover affects institutional trading behavior. Institutions are less
likely to engage in buying activity during relatively cloudier periods. DSKC
negatively impacts Investor BSI across a wide variety of specifications.
Additionally, these relationships are robust to alternative tests that take into
account stock-level factors.
5. Investor Mood, Stock Prices, and Return Comovement

Our results from the tests in the previous sections demonstrate that weather-
based proxies of mood impact institutional investor beliefs and trading behavior.
A related question is whether mood also impacts stock prices through its effect
on investors, which is the focus of this section. Our key finding is that stock-level
mood proxies that incorporate deseasonalized cloud cover across institutional
investors, or StockDSKC, negatively impact returns of stocks with higher
arbitrage costs. We also provide evidence of return comovement attributable to
the mood proxies.
5.1 Investor mood and stock prices: Regression specification

Because the trading database only represents a fraction of the entire universe
of institutional investors, our tests in this section utilize 13(f) holdings data
to construct stock-level measures of investor mood. We restrict the sample to
stocks represented in the 13(f) holdings data that can be matched to the weather
data. StockDSKC is expected to have a negative relationship with daily stock
returns.
Hirshleifer and Shumway (2003) posit that weather fluctuations are more
likely to impact the sign of stock returns rather than the magnitude and so we
employ similar tests. In particular, we estimate an OLS regression model in
which the dependent variable of interest is a binary variable, or PosRet, which
takes value one for the positive stock return days, and zero otherwise.
PosReti,t = g0 +g1 ∗StockDSKCi,t +g∗Xi,t +εi,t
Here, Xi,t represents a set of explanatory variables that includes the natural
logarithm of the market capitalization from the end of the previous quarter, the
proportion of shares held by institutional investors in the stock, the inverse of
the share price from the end of the previous quarter, a Monday dummy variable,
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a January dummy variable, and a composite SAD measure that is constructed

similarly to StockDSKC. The coefficient on the StockDSKC variable is expected
to be negative, or g1 <0.
Several econometric issues are expected to bias our tests away from our
predictions. First, the explanatory power of StockDSKC is expected to vary
according to costs related to arbitrage. Mispricing arising from trades motivated
by investor mood is expected to be quickly corrected by other investors in the
absence of short-sale constraints. However, when these constraints are binding,
the effects of mispricing are expected to persist (Nagel 2005). We measure

arbitrage costs, or ArbCosts, associated with binding short-sale constraints as
the inverse of one plus the proportion of shares held by institutional investors
in a particular stock, so that higher ArbCosts corresponds with stocks that are
more likely to have binding short-sale constraints. We expect the weather effect
to be pronounced in stocks with higher ArbCosts and estimate effects across
subsamples based on ArbCost rankings accordingly.
Second, the frequency of the holdings data does not allow us to observe
investor positions within each quarter. In particular, we cannot identify investors
that may actively trade in a stock but hold no position at the SEC filing dates.
Measurement errors related to the observation frequency are unlikely to be
systematic, which could lead to attenuation bias on the coefficients in our tests.
Additionally, investors with short positions are not accounted for in StockDSKC,
so that pessimistic investors may not be represented in the measure.
5.2 Investor mood and stock prices: Stock return regression estimates
Table 8 displays the OLS results from the PosRet models. Panel A reports the
estimates when we include only the weather variables in the models, whereas
panel B reports the estimates when all the conditioning variables are included.
The coefficient estimates for the conditioning variables are not reported to
conserve space.
The first two models report the pooled model estimates. The remaining eight
columns report the model estimates on sample splits based on the ArbCosts
rankings. Models 3 and 4 are estimated for the sample in which ArbCosts is
the lowest 50th sample percentile. Models 5 and 6 are estimated on the sample
in which ArbCosts is between the 50th and 80th sample percentiles. Models 7
and 8 are estimated on the sample in which ArbCosts is between the 80th and
95th sample percentiles. Models 9 and 10 are estimated on the sample in which
ArbCosts is between the 95th and 100th sample percentiles.
The first row displays the estimates on the StockDSKC variable. In panel
A, the StockDSKC coefficient in the pooled sample is statistically insignificant
(estimate = −0.003; t-value = −0.14) with only the weather variables. However,
the results from the regression models using subsamples based on ArbCosts
rankings suggest that the weather effect is concentrated among stocks with
higher arbitrage costs. For stocks with ArbCosts in the 95th to 100th sample
percentile range, StockDSKC is negative and statistically significant (estimate
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Table 8
Stock-level SKC and daily stock returns
All [0%,50%] [50%,80%] [80%,95%] [95%,100%]
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(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Panel A: Weather variables only
StockDSKC −0.003 0.025 0.002 −0.030∗∗ −0.029∗∗∗
(0.024) (0.034) (0.023) (0.015) (0.009)
StockSKC −0.002 0.026 0.004 −0.029∗ −0.028∗∗∗
(0.024) (0.034) (0.023) (0.015) (0.009)
Seasonal StockSKC 0.100∗∗ 0.057 0.098∗∗ 0.080∗∗∗ −0.028
(0.048) (0.073) (0.048) (0.030) (0.017)
N 8,590,220 8,590,220 4,295,101 4,295,101 2,577,086 2,577,086 1,288,516 1,288,516 429,517 429,517
Adjusted R 2 0.000% 0.017% 0.003% 0.013% 0.000% 0.016% 0.007% 0.011% 0.009% 0.024%
Panel B: Weather variables with conditioning variables
StockDSKC 0.004 0.024 0.004 −0.026∗ −0.022∗∗
(0.024) (0.034) (0.023) (0.015) (0.009)
StockSKC 0.004 0.026 0.004 −0.026∗ −0.020∗∗
(0.024) (0.034) (0.023) (0.015) (0.009)
Seasonal StockSKC 0.053 0.074 0.073 0.010
−0.061∗∗∗
(0.053) (0.086) (0.054) (0.032) (0.018)
N 8,590,220 8,590,220 4,295,101 4,295,101 2,577,086 2,577,086 1,288,516 1,288,516 429,517 429,517
Adjusted R 2 0.235% 0.239% 0.098% 0.108% 0.160% 0.167% 0.166% 0.166% 0.205% 0.234%
The dependent variable in the OLS model below is an indicator variable (PosRet) taking the value of one for positive return days and 0 otherwise.
P osReti,t = g0 +g1 StockDSKCi,t +g2 Mondayt +g3 J anuaryt +g4 StockSADi,t +g5 MktCapi,t +g6 StockLiqi,t +εi,t
The top matter of the table presents the subsample definition based on the ArbCosts rankings. The first two models present the pooled estimates. The remaining columns present the subsample
estimates based on ArbCosts rankings for the entire 1999–2010 sample period: [0%,50%] in models 3 and 4; (50%,80%] in models 5 and 6; (80%,95%] in models 7 and 8; and (95%,100%]
in models 9 and 10. We define ArbCosts as the inverse of the proportion of shares held by institutional investors in the stock. Panel A presents estimates from the models that only include the
weather variables, whereas panel B presents estimates from the models that also include the conditioning variables. The estimates on the conditioning variables are not reported to conserve
space. Deseasonalized stock-level SKC (StockDSKC) is defined as the difference in StockSKC and Seasonal StockSKC. Refer to the text for further details on construction. Robust standard
Page: 103
errors clustered on the stock and date levels are displayed in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
103
73–111
= −0.029; t-value = −3.03). The coefficients before that point are relatively
higher but mostly statistically insignificant. Using StockSKC and Seasonal
StockSKC instead yields similar results. When we include the conditioning
variables, panel B shows that the StockDSKC coefficients attenuate somewhat
but remain statistically significant.
The StockDSKC coefficient is statistically significant in stocks within the top
sample quintile based on ArbCosts. The average proportion of shares held by
institutional investors within those stocks ranges from 2% to 20%. Although
we cannot construct mood proxies for stocks not represented in the 13(f)

holdings data, these stocks are expected to be characterized with relatively
higher arbitrage costs. Accordingly, it may be reasonable to expect a detectable
mood effect in stocks with no institutional ownership.
5.3 Investor mood and stock prices: Robustness checks

We consider several alternative specifications to assess the robustness of the
OLS results. First, using probit instead of OLS regression models, we estimate
similar tests in Table 9, which is formatted similarly to Table 8. As before,
only marginal effects are reported for comparability with the OLS estimates.
The marginal effects are virtually identical to the OLS estimates, though the
standard error estimates are slightly larger.
Second, we re-estimate the standard errors for the OLS estimates to correct
for serial dependency in the residual terms using the procedure described by
Driscoll and Kraay (1998). Table A.3 from the Online Appendix reports the
results and shows that the Driscoll-Kraay standard errors are generally smaller
than those obtained using two-level clustering.
Third, we examine whether our results are sensitive to the measure of
arbitrage costs used. In untabulated estimates, we obtain similar results when
we redefine ArbCosts using other proxies, such as market capitalization or
idiosyncratic volatility, though the results are slightly weaker.
Finally, we consider whether our results can be explained in part by the
effect of mood fluctuations of market makers in NYSE stocks. Goetzmann
and Zhu (2005) show that New York City cloud cover negatively impacts
daily NYSE index returns and most of explanatory power is concentrated
on days that experience the largest change in spreads in S&P 100 stocks. In
untabulated results, we find similar results when we exclude NYSE stocks. We
also explore alternative specifications that include New York City cloud cover
as an additional conditioning variable and find that it has little impact on our
findings.
5.4 Investor mood and return comovement

The results from the previous section confirm that the investor mood proxy
has a negative impact on daily stock returns. Using StockDSKC as our proxy
for investor mood, we next examine whether investor mood can induce return
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Table 9
Probit model estimates
All [0%,50%] (50%,80%] (80%,95%] (95%,100%]
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
[10:36 8/12/2014 RFS-hhu063.tex]

Panel A: Weather variables only
StockDSKC −0.003 0.025 0.002 −0.030∗ −0.029∗∗
(0.024) (0.034) (0.023) (0.016) (0.011)
StockSKC −0.002 0.026 0.004 −0.029∗ −0.028∗∗
(0.024) (0.034) (0.023) (0.016) (0.011)
Seasonal StockSKC 0.100∗∗ 0.057 0.098∗∗ 0.080∗∗ −0.028
(0.048) (0.074) (0.048) (0.031) (0.021)
N 8,590,220 8,590,220 4,295,101 4,295,101 2,577,086 2,577,086 1,288,516 1,288,516 429,517 429,517
Pseudo R 2 0.000% 0.012% 0.002% 0.010% 0.000% 0.011% 0.005% 0.008% 0.007% 0.018%
Panel B: Weather variables with conditioning variables
StockDSKC 0.004 0.024 0.004 −0.026 −0.022∗∗
(0.024) (0.034) (0.023) (0.016) (0.011)
StockSKC 0.004 0.026 0.004 −0.026 −0.020∗
(0.024) (0.034) (0.023) (0.016) (0.011)
Seasonal StockSKC 0.053 0.074 0.073 0.010 −0.061∗∗∗
(0.053) (0.086) (0.054) (0.033) (0.022)
N 8,590,220 8,590,220 4,295,101 4,295,101 2,577,086 2,577,086 1,288,516 1,288,516 429,517 429,517
Pseudo R 2 0.235% 0.239% 0.098% 0.108% 0.160% 0.167% 0.166% 0.166% 0.205% 0.234%
The dependent variable in the probit model below is an indicator variable (PosRet) taking the value of one for positive return days and 0 otherwise.

P(P osReti,t |Zi,t ) = Zi,t ,
where Zi,t = h0 +h1 StockDSKCi,t +h2 Mondayt +h3 J anuaryt +h4 StockSADi,t +h5 MktCapi,t +h6 StockLiqi,t .
Only marginal effects are reported. The top matter of the table presents the subsample definition based upon the ArbCosts rankings. The first two models present the pooled estimates. The
remaining columns present the subsample estimates based on ArbCosts rankings for the entire 1999–2010 sample period: [0%,50%] in models 3 and 4; (50%,80%] in models 5 and 6;
(80%,95%] in models 7 and 8; and (95%,100%] in models 9 and 10. We define ArbCosts as the inverse of the proportion of shares held by institutional investors in the stock. Panel A presents
estimates from the models that only include the weather variables, whereas panel B presents estimates from the models that also include the conditioning variables. The estimates on the
conditioning variables are not reported to conserve space. Deseasonalized stock-level SKC (StockDSKC) is defined as the difference in StockSKC and Seasonal StockSKC. Refer to the text
Page: 105
for further details on construction. Robust standard errors clustered on the stock and date levels are displayed in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and
105
10% levels, respectively.
73–111
comovement. We also examine the duration of these effects across different

time horizons.
We adapt the return comovement tests from Green and Hwang (2009) and
Kumar, Page, and Spalt (2013) for the analysis. Because we are interested in
relatively shorter investment horizons than what is considered in those studies,
we use daily stock returns data for estimation. First, we construct two portfolios
based on daily StockDSKC rankings, using only stocks either in the lowest or
in the highest 30th sample percentile for each date. The resulting two portfolios
are defined as low StockDSKC (Optimistic) and high StockDSKC (Pessimistic).

For each portfolio j , Mood j is the portfolio return in excess of the risk-free
rate and is value weighted and rebalanced daily.28
Second, the coefficient on each Mood portfolio is estimated for each stock
using rolling, time-series regressions that include the Mood portfolios, the Fama
and French (1993) factors (MKTRF, HML, and SMB), and the Carhart (1997)
momentum factor (UMD). If stock i is included in either of the Mood portfolios
at any point in time, the Mood portfolio is reconstructed to exclude stock i to
avoid any mechanical relation. The model takes the following form

Ri,t −Rf,t = β0 + βj Moodj,t +βMKTRF MKTRFt
j ∈ {P essimistic,
Optimistic}
+βHMLHMLt +βSMB SMBt +βUMD UMDt +εi,t

The comovement measures are the coefficients from the Mood portfolios.
We use forward-looking 30- and 90-day estimation windows for the rolling
regression models, each resulting in a panel of parameter estimates based on
overlapping data. For inclusion in the sample, we require that each estimate is
calculated using a sufficient number of returns observations.29
Finally, we compare the comovement estimates across stocks based on the
StockDSKC rankings. Specifically, we calculate the value-weighted average
of each portfolio loading for quintile groups based on StockDSKC rankings
for each date. We predict that βPessimistic will be higher for stocks with higher
StockDSKC values. Likewise, we predict that βOptimistic will be lower for stocks
with higher StockDSKC values. We calculate these estimates for both the 30-
day and 90-day estimation windows. Because of the overlapping estimation
windows used in the regression procedure, we adjust the standard errors
using the procedure described by Newey and West (1994) to correct for
heteroscedasticity and serial correlation.30
28 We find similar results for equal weighted portfolios.
29 Specifically, we require that the estimate use at least 10 and 30 days of nonmissing returns data for the 30- and
90-day estimation procedures, respectively.
30 Lag selection for each specification is based upon the procedure of Newey and West (1994). We also consider
alternative kernels to compute bandwidths and use the ones that provide the most conservative standard error
estimates.
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0.25
0.25
0.15
0.15
0.05
0.05
-0.05 -0.05
-0.15 -0.15
LO 2 MD 4 HI HI-LO LO 2 MD 4 HI HI-LO
Panel A: 30-day estimation window

0.25 0.25
0.15 0.15
0.05 0.05
-0.05 -0.05
-0.15 -0.15
LO 2 MD 4 HI HI-LO LO 2 MD 4 HI HI-LO
Panel B: 90-day estimation window
Figure 2
Comovement estimates on StockDSKC portfolios
This figure displays the comovement estimates on the factor portfolios associated with Optimistic (light bars,
left) and Pessimistic (dark bars, right) Mood portfolios. For each bar graph, the sample average over the daily,
value-weighted comovement estimates for each StockDSKC quintile group is reported, from the lowest (LO) to
the highest (HI) daily StockDSKC rankings. If a stock also belongs to either the Optimistic or the Pessimistic
Mood portfolio, the stock is removed from the factor portfolio before calculating the comovement estimate.
The differences between the high and low quintile group estimates (HI-LO) are reported to the right. Panel A
displays the graphs for the 30-day estimation window. Panel B displays the graphs for the 90-day estimation
window. Ninety percent confidence intervals are overlaid on each series based on the Newey-West standard error
estimates.
The results are graphically represented in Figure 2. The comovement

estimates using a 30-day estimation window are represented in panelA, whereas
those using the 90-day estimation window are reported in panel B.
Using the 30-day estimation window, we find that βOptimistic decreases in the
StockDSKC rankings, whereas βPessimistic increases in the StockDSKC rankings,
as shown in panelA. To formally test our predictions, we calculate the difference
in βPessimistic and βOptimistic across the highest and lowest StockDSKC quintile
groups. The difference is negative and statistically significant for βOptimistic
(estimate = -0.071; t-value = -3.86) and is positive and statistically significant
for βPessimistic (estimate = 0.042; t-value = 2.08). The differences are slightly
larger for the βOptimistic estimates. For the results from the 90-day estimation
window reported in panel B, βOptimistic retains a similar pattern as before.
However, the difference is no longer statistically significant at the 10% level
(estimate = -0.020; t-value = -0.91). Likewise, for the βPessimistic estimates,
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the differences remain positive but are also statistically insignificant (value =
0.014, t-value = 0.58).
In summary, the results provide evidence of return comovement attributable
to the investor mood proxy. They also suggest that the weather effect is not long
lived, given that weather patterns fluctuate more over longer time horizons.
Consequently, the mood effect related to weather is unlikely to persist for long
periods of time.

6. Conclusion
Several studies demonstrate that weather-based mood proxies explain variation
in trading volume and prices of broad-based stock indexes. They use cloud cover
in major stock market locations as a proxy for investor mood. In contrast to
these earlier studies, we use disaggregated data on the locations of institutional
investors to examine how weather-based measures of investor mood affect
perceptions and trading behavior, as well as individual stock returns. To our
knowledge, this study is the first to examine the direct impact of weather on
the trading behavior of institutional investors.31
We find that the weather-based mood measures affect institutional
investors’ perceptions about market mispricing, thereby supporting mood-
based explanations in the existing literature. Specifically, using survey data, we
show that investor optimism, associated with lower values of deseasonalized
cloud cover, is negatively associated with perceived overpricing in both
individual stocks and the DJIA. Next, we use disaggregated trade data to
provide additional evidence that investor optimism increases their propensities
to buy. Finally, we also find that our stock-level investor mood measure
explains a significant amount of variation in daily returns of stocks associated
with higher arbitrage costs. In addition, we document return comovement
attributable to investor mood. Collectively, these findings complement existing
studies that document the effect of weather-induced mood on stock market
returns.
In future work, it would be interesting to examine whether other groups
of economic agents are also influenced by mood. For example, the decisions
of firm managers that have greater autonomy in decision making, such as
those of small- and medium-sized enterprises, may be more susceptible to
mood-related biases, which, in turn, may significantly impact hiring and
investment decisions. The forecasts of sell-side equity analysts also may be
influenced by weather, which could affect how market participants incorporate
new information into prices. We leave these interesting questions for future
research.
31 One notable exception is Loughran and Schultz (2004), who indirectly examine the effect of localized trading
by firm headquarter locations.
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Weather-Induced Mood, Institutional

Investors, and Stock Returns

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induced by weather as information when making assessments about objects

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10th percentile in deseasonalized cloud cover represent more than 9% of its

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may not necessarily be subject to the same dynamics.7 We offer direct

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experienced over time. Affective states can influence how individuals

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in biorhythm due to changes in seasons.13 Nevertheless, because light therapy

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2. Data and Summary Statistics

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1999 to December 2010. ANcerno is a widely recognized consulting firm

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Panel B: Trade data

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2.2 Variable construction

17 The haversine formula calculates the distance between locations 1 and 2 as d

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2.2.2 Investor perceived mispricing measures. We begin the empirical

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2.2.3 Investor trade measures. We construct two measures based on the

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2.2.4 Stock-level mood proxies. We construct a stock-level measure of

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2.3 Summary statistics

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(19.5%) than too low (14.8%) relative to fundamentals. By construction, the

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3. Weather-Induced Mood and Perceived Mispricing

3.1 Univariate estimates

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In panel A of Table 2, the correlation coefficients amongst the survey

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correlation with measures related to perceived underpricing, and the correlation

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result in bullish responses over non-critical ones. The lack of statistically

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3.2 Perceived mispricing regression specification

Yi,t = b0 +b∗1 DSKCi,t +b∗Xi,t +εi,t

The dependent variables in the regression models are TooHigh, TooLow,