Weather

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2.3 Weather

Many researches indicate that weather conditions influence people’ mood, feelings, emotions, and risk attitude, which then affect people’ behavior and decision-making.

Mellers and McGraw (2001) found that greater anticipated good weather make people feel more optimism and risk seeking, whereas less anticipated good weather make people feel more pessimism and risk aversion. Cao and Wei (2004) found that lower temperature makes investors feel risk seeking, while higher temperature makes investors feel risk aversion. They further examined the relationship between temperature and the stock returns within eight international stock markets (including Taiwan), and found there existed negative correlation between temperature and returns.

Lower temperature is relative to higher stock returns and higher temperature is relative to lower stock returns. Bassi et al. (2013) implemented a lottery choice experiment to observe risk preference of 262 participants from March 2011 to September 2012. They employed a multiple price list method, and found that good weather and sunshine are associated with upbeat mood, which makes people feel risk seeking. Hirshleifer and Shumway (2003) examined the relationship between sunshine and stock market index returns across 26 countries (including Taiwan) from 1982 to 1997. The result indicated morning sunshine in the city of a country's leading stock exchange is significantly correlated with stock returns.

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We analyzed the trading data of Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) futures contracts traded on Taiwan Futures Exchange (TAIFEX) from January 2007 to December 2007. The underlying asset of TAIEX futures is TAIEX, which is value weighted index of all common stocks listed on Taiwan Stock Exchange (TWSE). The contract value of TAIEX futures is index points of TAIEX multiplied by 200 Taiwan Dollars (TWD). The trading time of TAIFEX is from 8:45 a.m. to 1:45 p.m.

Taiwan time Monday through Friday of regular business days of TWSE. The daily price limit was +/-7% of the previous trading day’s settlement price in 2007. The delivery months include the spot month, next calendar month, and next three quarterly months.

The last trading day is the third Wednesday of the delivery month of each contract. All futures contracts are automatically exercised on the expiration date and are settled with cash. Each investor should open a margin account and save the initial margin at the broker. When the margin is below the maintenance margin, the margin account should be refilled back to the initial margin level, otherwise the margin account will be closed automatically by TAIFEX. The database offers the detailed trading information. We chose the information of the trading date and time, trading price, trading quantity, trading direction (buy or sell), trader types, and trading account to do further analyses.

We chose the domestic corporations, domestic individuals, domestic institutions, and foreign institutions as our four types of investors, and the summarized information is presented in the Table 1. From Table 1, we can see that the total trading frequencies among four types of investors during 2007 were 11.7 million times, and the domestic individuals represent the most percentage (74.4%) in TAIFEX.

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studies, we chose temperature, rain, and sunshine as our weather variables to do further analyses. Because the TAIFEX is located in Taipei, we collected Taipei weather data of monthly averaged temperature, monthly accumulated rain, and monthly accumulated sunshine from the Taiwan Central Weather Bureau (TCWB) during 2007. Table 2 presents the summarized monthly weather information.

Table 1 Trading frequency and percentage of four types of investors Types of Investors Trading Frequency Trading Percentage

domestic corporations 72,065 0.62%

domestic individuals 8,710,187 74.40%

domestic institutions 2,031,325 17.35%

foreign institutions 893,328 7.63%

Sum 11,706,905 100%

Table 2 Summary statistics of weather variables

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Month Temperature(℃) Rain(mm) Sunshine(hr)

2007/01 17.3 111.4 94.7

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3.2 Research Methodology

This dataset records the trades by second. We tracked every investor’s purchase quantity and average purchase price as well as selling quantity and average selling price of each trade. We defined each investor as holding a net long (short) position according to the first trading direction (buy or sell) during the sample period until the investor closes the position. We calculated the average cost of every transaction by volume weighted average price for each investor according to every trading direction. The average cost of the net long position is the average purchase price, while that of the net short position is the average selling price. At any time, an investor’s position is either net long or net short or no position (closes the position). When the investor of a net long position continues to buy or the investor of a net short position continues to sell, the average cost is recalculated. On the other hand, when the investor of a net long position sells or the investor of a net short position buys, the average cost remains the same.

If the investor has the position, there must be papers gains or paper losses. We then compare the trading price to the average cost to decide whether the position is traded at gains or at losses. When the trading price is higher (lower) than the average cost of the net long (short) position and the investor does not close the position, the position is counted as paper gains. In the meantime, the investor can close the position, and turn the paper gains into the realized gains. In contrast, when the trading price is lower (higher) than the average cost of the net long (short) position and the investor does not close the position, the position is counted as paper losses. If the investor closes the position, the paper losses will turn into the realized losses.

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We employed the methodology developed by Odean (1998) to measure every investor’s disposition effect of each transaction. We first calculated every investor’s paper gains, paper losses, realized gains, and realized losses of each transaction in order to calculate the PGR and PLR. Then, we used PGR minus PLR to measure the disposition effect (DE) of each investor.

Proportion of gains realized (PGR) = Realized Gains

Realized Gains + Paper Gains (1)

Proportion of losses realized (PLR) = Realized Losses

Realized Losses + Paper Losses (2)

Because weather information is the monthly data (presented in the Table 2), we separately sum every investor’s PGR, PLR, and disposition effect (DE) of each transaction monthly according to four types of investors (including domestic corporations, domestic individuals, domestic institutions, and foreign institutions).

Table 3 presents the information of monthly PGR, PLR, and DE of four types of investors during 2007. From Table 3, we can see that domestic individuals have the highest disposition effect, which is consistent with the findings from Choe and Eom (2009) and Li et al. (2013).

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Table 3 Summary statistics of disposition effect (PGR-PLR) domestic

To the best of our knowledge, there have been very few researches to investigate the effect of weather on disposition effect. Besides, some studies examined disposition effect vary across different types of investors in different countries’ stock and futures markets (Locke and Mann, 2000; Frino et al., 2004; Brown et al., 2006; Chen et al., 2007; Choe and Eom, 2009 and Li et al., 2013). Others examined disposition effect, overconfidence, and representativeness bias (Chen et al., 2007), disposition effect and underreaction to news (Frazzini, 2006), disposition effect and momentum (Grinblatt and Hany, 2001). To the best of our knowledge, there have been very few researches to investigate the control variables of disposition effect. As a result, we only use weather variable as our independent variable to examine the effect of weather on disposition effect of four types of investors.

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3.3 Hypotheses Development

According to the literature presented previously, we derive the following two hypotheses.

Hypothesis 1: Disposition effect may vary across four types of investors, and the domestic individuals would exhibit significant disposition effect.

From previous studies, we learn that the disposition effect exists among different types of investors in different countries’ futures market. Choe and Eom (2009) indicated that the disposition effect of individual investors is stronger than that of the institutional and foreign investors in the Korean stock index futures market. On the other hand, Li et al. (2013) found that the disposition effect of retail investors and foreign institutional investors are significant, while that of the proprietary investors is not obvious in Taiwan futures market. As a result, we extend the concept derived from the previous studies and consider that disposition effect may vary across four types of investors (including domestic corporations, domestic individuals, domestic institutions, and foreign institutions) in TAIFEX, and the domestic individuals would exhibit significant disposition effect.

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Hypothesis 2: Weather may influence the disposition effect of four types of investors through its effect on risk preference, which is measured by PGR and PLR. The lower temperature, less rain, and more sunshine make four types of investors exhibit risk seeking, which leads to PGR, PLR, and disposition effect decrease. On the other hand, higher temperature, more rain, and less sunshine make four types of investors exhibit risk aversion, leading to PGR, PLR, and disposition effect increase.

Kahneman and Tversky (1979), Shefrin and Statman (1985), and Odean (1998) proposed that disposition effect indicates investors exhibit risk aversion in gains and believe information has reflected in prices, which lead to sell winners early and proportion of gains realized (PGR) is higher. On the other hand, investors exhibit risk seeking in losses and believe information has not reflected in prices, which lead to hold losers long and proportion of losses realized (PLR) is lower. When PGR is significantly higher than PLR, which means individual investors have high disposition effect (DE).

As a result, we extend the concept derived from previous studies and consider that in gains, investors who exhibit risk seeking think information has not reflected in prices, so prices will continue to go up. They tend to hold on gains, which makes PGR decreases. In losses, investors who exhibit risk seeking also think information has not already reflected in prices, so prices will go up in the future. They tend to hold on losses, and believe losers will mean revert someday, which makes PLR decreases. Because of the asymmetric risk seeking degree of investors in gains and losses, the decreasing degree of PGR is larger than the decreasing degree of PLR, which leads to disposition effect decrease. On the other hand, in gains, investors who exhibit risk aversion think information has already reflected in prices, so prices are too high now. They tend to realize gains, which makes PGR increases. In losses, investors who exhibit risk aversion

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tend to realize losses in order to limit losses, which makes PLR increases. Because of the asymmetric risk aversion degree of investors in gains and losses, the increasing degree of PGR is larger than the increasing degree of PLR, leading to disposition effect increase. In summary, risk seeking makes PGR, PLR, and DE decrease, while risk aversion makes PGR, PLR, and DE increase.

Many researches indicate that weather conditions influence investors’ mood and risk attitude, which then affect investors’ behavior and decision-making. Cao and Wei (2004) found that lower temperature makes investors feel risk seeking, while higher temperature makes investors feel risk aversion. Bassi et al. (2013) found that good weather and sunshine are associated with upbeat mood, which makes people feel risk seeking. From the above studies, we conclude that lower temperature, less rain, and more sunshine make investors exhibit risk seeking, while higher temperature, more rain, and less sunshine make investors exhibit risk aversion.

To the best of our knowledge, there have been very few researches to investigate the relationship between weather and disposition effect. However, there are many previous studies indicating that weather influences investors’ behavior and financial decision-making through its effect on investors’ mood and risk attitude. As a result, we extend the concept derived from the previous studies and consider the lower temperature, less rain, and more sunshine make investors exhibit risk seeking. Believe information has not reflected in prices and prices will continue to go up. Investors tend to hold on gains and losses, which lead to both PGR and PLR decrease. Because of the asymmetric risk seeking degree of investors in gains and losses, the decreasing degree of PGR is larger than the decreasing degree of PLR, which leads to disposition effect decrease. On the other hand, higher temperature, more rain, and less sunshine make investors exhibit risk aversion. Believe information has reflected in prices and prices

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are too high now. Investors tend to realize gains and losses, leading to both PGR and PLR increase. Because of the asymmetric risk aversion degree of investors in gains and losses, the increasing degree of PGR is larger than the increasing degree of PLR, leading to disposition effect increase. Weather may influence disposition effect of four types of investors through its effect on risk preference, which is measured by PGR and PLR.

Therefore, instead of directly examining the relationship between weather and disposition effect, we separately examine the relationship between weather and PGR, and the relationship between weather and PLR, which then lead to disposition effect.

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l C h engchi U ni ve rs it y 4. Empirical Results

4.1 Disposition Effect of Four Types of Investors

We first sorted investors into four groups by their characteristics, which include domestic corporations, domestic individuals, domestic institutions, and foreign institutions. Then, we set the dummy variables for each type of investors to examine disposition effect of four types of investors. The result is presented in the table 4 with 11.7 million trading frequencies. As we expected, domestic individuals exhibit significant disposition effect, as p-value is below 0.01. This result is consistent with the findings from Choe and Eom (2009) and Li et al. (2013). However, the differences between our research and previous ones is that not only domestic individuals exhibit significant disposition effect, but also domestic corporations exhibit significant disposition effect, as p-value is below 0.01. Moreover, domestic individuals have higher disposition effect than domestic corporations. A possible explanation is that domestic individuals invest in the TAIFEX for the purpose of accumulating wealth. They avoid realizing losses because they feel regretful to see their wealth decreasing, while seeking gains realization because they feel pride to see their wealth increasing.

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Table 4 Disposition effect of four types of investors

*indicates significant at 10%, **indicates significant at 5%, ***indicates significant at 1%.

The regression analysis takes the following form.

DE = β₁ D_DC+ β₂D_DID+ β₃D_DIS+ β₄D_FIS

Where DE is disposition effect, D_DC is the dummy variable of domestic corporations, D_DID is the dummy variable of domestic individuals, D_DIS is the dummy variable of

domestic institutions, and D_FIS is the dummy variable of foreign institutions.

Model Disposition Effect (PGR-PLR)

Domestic Corporations 0.00781***

(5.62)

Domestic Individuals 0.02739***

(216.75)

Domestic Institutions 0.00000565

(0.02)

Foreign Institutions 0.00006896

(0.17) 0.004 0.004

N 11,706,905

20 𝑅²

𝐴𝑑𝑗 − 𝑅²

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4.2The effect of weather on Disposition Effect

We examined how weather influences the disposition effect (DE) through its effect on risk preference, which is measured by PGR and PLR. We orderly regressed weather to PGR, weather to PLR, and weather to DE with different samples, including domestic corporations, domestic individuals, domestic institutions, and foreign institutions.

Because weather information is the monthly data (presented in the Table 2), we first separately sum every investor’s PGR, PLR, and DE of each transaction monthly according to four types of investors (presented in the Table 3).

We then ran the correlation coefficient analysis on the independent variables (weather), and found there is high correlation among independent variables. The results are presented in the table 5. From table 5, we can see that there is 59% positive correlation between temperature and rain, while there is 72% positive correlation between temperature and sunshine. Because there is high correlation among independent variables, we put each independent variable (temperature, rain, and sunshine) respectively in the regression analysis without putting all the three independent variables simultaneously in order to prevent collinearity problem. The regression results are presented in the Table 6, Table 7, Table 8, and Table 9.

Table 5 Correlation coefficients of independent variables

Temperature Rain Sunshine

Temperature 1 0.592 0.723

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In Table 6, we present the effect of weather on the disposition effect (DE) through its effect on PGR and PLR among domestic corporations.

The positive relationship between temperature and disposition effect is significant at 5%. The temperature is positive relative to PGR, PLR, and DE. The results are consistent with our expectations. When the temperature increases, domestic corporations exhibit risk aversion. Believe information has reflected in prices and tend to realize gains and losses, leading to both PGR and PLR increase. Because of the asymmetric risk aversion degree in gains and losses, the increasing degree of PGR is more than the increasing degree of PLR, leading to DE increase. On the other hand, when the temperature decreases, domestic corporations exhibit risk seeking. Believe information has not reflected in prices and rend to hold gains and losses, leading to both PGR and PLR decrease. Because of asymmetric risk seeking degree in gains and losses, the decreasing degree of PGR is more than that of PLR, which leads to DE decrease.

The positive relationship between the rain and disposition effect is not significant.

The rain is positive relative to PGR, PLR, and DE. The results are consistent with our expectations. When the rain increases, both PGR and PLR will increase. The increasing degree of PGR is more than increasing degree of PLR, leading to DE increase. On the other hand, when the rain decreases, both PGR and PLR will decrease. The decreasing degree of PGR is more than the decreasing degree of PLR, which leads to DE decrease.

The positive relationship between the sunshine and disposition effect is not significant. The sunshine is positive relative to PGR, negative relative to PLR, and positive relative to DE. The results are not consistent with our expectations. When the sunshine increases, PGR will increase but PLR will decrease, which leads to DE increase more. On the other hand, when the sunshine decreases, PGR will decrease, but PLR will increase, which leads to DE decrease more.

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立 政 治 大 學

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Table 6 Regression analysis of domestic corporations

*indicates significant at 10%, **indicates significant at 5%, ***indicates significant at 1%. The regression analyses take the following forms.

PGR = α + β Temperature + ε PLR = α + β Temperature + ε DE = α + β Temperature + ε PGR = α + β Rain + ε PLR = α + β Rain + ε DE = α + β Rain + ε

PGR = α + β Sunshine + ε PLR = α + β Sunshine + ε DE = α + β Sunshine + ε

Model 1 2 3 Model 1 2 3 Model 1 2 3

Panel A:PGR Panel B:PLR Panel C:DE

Intercept 114.68 355.576*** 361.784*** Intercept 212.178 334.394*** 360.823*** Intercept -97.497 21.182 0.961

(0.77) (7.19) (3.66) (1.74) (8.91) (4.86) (-1.69) (1.04) (0.02)

Temperature 11.18 Temperature 5.692 Temperature 5.487**

(1.79) (1.12) (2.28)

Rain 0.089 Rain 0.047 Rain 0.042

(0.58) (0.4) (0.66)

Sunshine 0.138 Sunshine -0.123 Sunshine 0.262

(0.17) (-0.21) (0.82)

0.243 0.033 0.003 0.111 0.016 0.004 0.342 0.042 0.063

0.167 -0.064 -0.097 0.022 -0.082 -0.095 0.277 -0.054 -0.031

N 12 12 12 N 12 12 12 N 12 12 12

23 𝑅²

𝐴𝑑𝑗 − 𝑅²

𝑅² 𝑅²

𝐴𝑑𝑗 − 𝑅² 𝐴𝑑𝑗 − 𝑅²

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In Table 7, we present the effect of weather on the disposition effect (DE) through its effect on PGR and PLR among domestic individuals.

The positive relationship between the temperature and disposition effect is significant at 5%. The temperature is positive relative to PGR, PLR, and DE. The results are consistent with our expectations. When the temperature increases, domestic individuals exhibit risk aversion. Believe information has reflected in prices and tend to realize gains and losses, leading to both PGR and PLR increase. Because of the asymmetric risk aversion degree in gains and losses, the increasing degree of PGR is more than the increasing degree of PLR, leading to DE increase. On the other hand, when the temperature decreases, domestic individuals exhibit risk seeking. Believe information has not reflected in prices and tend to hold gains and losses, leading to both PGR and PLR decrease. Because of asymmetric risk seeking degree in gains and losses, the decreasing degree of PGR is more than that of PLR, which leads to DE decrease.

The positive relationship between the temperature and disposition effect is significant at 5%. The temperature is positive relative to PGR, PLR, and DE. The results are consistent with our expectations. When the temperature increases, domestic individuals exhibit risk aversion. Believe information has reflected in prices and tend to realize gains and losses, leading to both PGR and PLR increase. Because of the asymmetric risk aversion degree in gains and losses, the increasing degree of PGR is more than the increasing degree of PLR, leading to DE increase. On the other hand, when the temperature decreases, domestic individuals exhibit risk seeking. Believe information has not reflected in prices and tend to hold gains and losses, leading to both PGR and PLR decrease. Because of asymmetric risk seeking degree in gains and losses, the decreasing degree of PGR is more than that of PLR, which leads to DE decrease.

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