Every time that I have watched the Wimbledon final from a Sydney hotel room, Maria Sharapova has won. Every time I have watched the World Cup final in a downtown Boston bar, France have won. The problem with this sort of logic is, of course, easy to spot. I have only watched one Wimbledon final while down under and I’ve viewed only one World Cup final while across the pond.
Some dodgy patterns are a bit less easy to spot, however, one of the best known being the so-called ‘Superbowl effect.’ This effect, identified and published by Professors Krueger and Kennedy in the ‘Journal of Finance’ in 1990, ostensibly established a solid relationship between a team from the NFC (National Football Conference) winning America’s ‘Superbowl’ and an improvement the following year in the US stock market. The pattern could be traced back to 1967. Unfortunately for Kennedy and Krueger and fellow pattern spotters, however, it soon came crashing down to earth, along with the Denver Broncos.
Now the ‘Superbowl’ effect, as it has come to be known, always did have a dodgy feel to it, if only because there didn’t seem any rhyme or reason why it should work. Other so-called ‘anomalies’ are rather more difficult to dismiss, however, one of the most well-known of these being the ‘Weather Effect’, first highlighted by Professor E.M. Saunders in a famous article published in 1993 in the ‘American Economic Review.’ In that paper, he argued that there was a link between the weather and the performance of stocks on Wall Street – the better the weather, the better the stocks performed.
The question confronting anyone interested in turning a profit was whether this was a genuine relationship or another freak finding? Well, for once those of a sceptical disposition were chastened, courtesy of a follow-up study by David Hirshleifer and Tyler Shumway, released in 2001. In that study, entitled, ‘Good Day Sunshine: Stock Returns and the Weather’, they confirmed using a different data set that there was indeed a positive link between stock returns and good weather. The reason, they argued, was a feel-good factor influencing investor sentiment. Interestingly, a Yale University working paper published the following year found that the market-makers played a big part in this, widening the spreads in the financial markets on cloudy days. In other words, the link between good weather and stock returns could, they argued, be traced in significant part to the behaviour of market-makers.
As John Lennon and Paul McCartney once put it, “I need to laugh, and when the sun is out, I’ve got something I can laugh about. I feel good in a special way: I’m in love and it’s a sunny day. Good Day Sunshine, Good Day Sunshine, Good Day Sunshine.”
Ah well, if only the duo had applied their idea to the stock market! I guess they could have beaten Professor Saunders to it. And who knows? They might even have become rich and famous.
Links:
http://www.jstor.org/pss/2117565
http://econpapers.repec.org/article/blajfinan/v_3a45_3ay_3a1990_3ai_3a2_3ap_3a691-97.htm
http://www.irvinehousingblog.com/wp-content/uploads/2007/11/sunshine-and-trading.pdf
Author: Professor Leighton Vaughan Williams, Nottingham Business School, Nottingham Trent University.
Can Orange Juice Help Forecast the Weather?
Well over 90% of all US oranges used in frozen concentrated orange juice are grown in central Florida. The reason is that oranges grown in central Florida produce better concentrated orange juice than oranges grown in California, the other major source of oranges in the US.
Clearly this makes the weather in central Florida of critical importance to the market price of orange juice. One would expect, therefore, that the weather forecast for central Florida should be a key factor influencing the price at which orange juice futures trade. That’s one thing. But what now if we phrase the issue in reverse? Can we use these orange price futures to actually forecast the weather? And if so, how well do forecasts so obtained compare with the forecasts issued by the official National Weather Service?
A study carried out by Professor Richard Roll of the Graduate School of Management at the University of California sought to find out. In the resulting research paper, called “Orange Juice and Futures”, published in the American Economic Review in December 1984, Roll found what he termed a “statistically significant relation between OJ returns and subsequent errors in temperature forecasts issued by the National Weather Service for the central Florida region.”
In particular, if the closing orange juice futures price is higher than its opening price, we would obtain a more accurate prediction of the weather by adjusting downward the National Weather Service’s weather forecast. This is because a higher futures price implies a smaller crop and colder weather. Correspondingly, if the orange juice futures price is lower than its opening price, we should adjust upwards.
A front-page article in Florida’s St. Petersburg Times, on Monday, October 17, 1983, puts this in some perspective. “The National Weather Service spends $280 million each year predicting the nation’s weather,” it runs, “and it uses some of the niftiest gadgets … to do it. But it may be overlooking the price of orange juice.”
In an interview with the paper, Roll noted how in 1981, when the temperature in central Florida fell into the 20s (Fahrenheit) for four consecutive nights, the price of orange juice futures rose 40%. “They [the traders] have their own meteorologists”, he explained. “They have a bigger incentive than the Weather Bureau itself to predict it correctly.” In particular, if traders can anticipate falling temperatures they can buy before the price goes up and sell after it does.
An important point to note here is that nobody is saying that the official weather forecasting service is of no value. Indeed, the market might have been a lot less accurate if these forecasts didn’t exist. What Roll’s study does suggest, however, is that the commodity markets add some information above and beyond this, much as opinion polls can help forecast election outcomes, without representing the totality of information available to the election betting markets.
Reference:
Richard Roll, Orange Juice and Weather, The American Economic Review, 74, 5, 1984, 861-880.
Link at: http://www.e-m-h.org/Roll1984.pdf
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Professor Leighton Vaughan Williams 