Market Performance in Consequence of Global Warming

This paper connects the direct impacts of the global warming and the stock market performance. The increased frequency of extreme temperatures observations is one of the many consequences of the climate change and this study analyses the impact of the extreme temperatures on the stock market performance. The existing literature provides the evidence for the linear relationship between the temperature and returns. However, the psychological studies of the impact of different temper- atures on the investor’s behaviour suggest that the extreme ambient temperatures may influence the risk assessment and aggressiveness so that the relationship be- tween the temperature and returns may happen to be non-linear. The behavioural finance findings combined with the observed climate change leading to the frequent occurrence of extreme ambient temperatures inspired my research. The paper tests the hypothesis of the non-linear effect of the extreme temperatures on the stock market performance. The results of the empirical study suggest that there is an evidence for the non-linear impact of extremely high ambient temperature on the stock returns. Specifically, findings show that there is a negative relationship between the temperature and the return until some threshold value of the temperature, after which the relationship between the two variables become less negative or even positive because of the aggressiveness’ domination over the apathy. However, the outcome regarding the low extreme temperature suggests that the negative linear impact of the temperature on the returns holds and therefore, no contradiction with the existing studies of the field is found. The robustness checks justify the results obtained from the study.