Weather-Induced Mood, Institutional Investors, and Stock Returns
This study shows that weather-based indicators of mood impact perceptions of mispricing and trading decisions of institutional investors. We use survey and disaggregated trade data to show that relatively cloudier days increase perceived overpricing in both individual stocks and the Dow Jones Industrial Index, and increase the selling propensities of institutions. We introduce stock-level measures of investor mood, and demonstrate that investor pessimism negatively impacts daily stock returns, mostly among stocks that are costly to arbitrage. We also document return comovement among stocks experiencing similar changes in weather-induced mood. These findings complement existing studies on the weather effect on stock index returns, and identify an additional channel through which it can manifest.