Weather and stock market volatility: the case of a leading emerging market

Abstract

This study examines how weather affects the stock market volatilities of a leading emerging market. By analysing both historical and model-free implied volatilities, we find that the historical volatility better captures the weather effect than the implied volatility. We also find that volatilities tend to increase in cloudy, wet and windless weather, and that investors asymmetrically react to extremely high weather conditions in comparison with extremely low weather conditions.

Keywords:

• weather effect
• volatility
• VKOSPI

JEL Classification:

• G02
• G14
• G15

Acknowledgements

The author is grateful for helpful comments and suggestions from Hyungsuk Choi, Jaeram Lee, and Joongwon Ro.

Notes

¹ Augmented Dickey–Fuller test results reject the null of unit roots.

² For details on the VKOSPI and the KOSPI200 options market, refer to Kim and Ryu (2012) and Ryu (2012, 2015).

³ W_it also includes absolute deseasonalized values for the variables or extreme weather condition dummies.

⁴ If the volatility premium effect is substantial, then the underlying market volatility will also rise. However, this is not the case in the KOSPI200 options market.

Additional information

Funding

This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government [NRF-2013S1A5A2A03045406].