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Weather effects on the returns and volatility
of the Shanghai stock market
國際財管
指導老師:何啟銘
學生:林武義
學號:ma380204
ABSTRACT
In order to analyze the influence of the opening of
B-share market to domestic investors, it is
assumed that domestic investors are more
sensitive to the Shanghai local weather than
foreign investors.
In doing so, extreme weather condition dummies
are generated by using the 21-day and 31-day
moving average and its standard deviation.
Empirical analysis provides two key results
regarding weather effects.
1. Introduction
The Shanghai stock market provides a unique(獨特)
source for examining (檢查)weather effects.
The Shanghai Stock Exchange(SHSE) divides its stock
market into a domestic board (A-share) and a foreign
board (B-share).
Most of the ownership of A-share is restricted to
residents of domestic investors, while that of B-share
is restricted to foreign investors. However, starting
from 19th February,2001,Chinese domestic investors
are allowed (允許)to trade B-shares.
This paper primarily examines whether there is a
relationship between the stock market and three
specific weather variables such as the temperature,
humidity, and sunshine duration, using the Shanghai
A-and B-share indexes.
2. Literature review
Psychologists have been long interested in the
influence of sunshine on individual’s behaviors.
Saunders[5]reported that cloud cover was negatively
correlated with the daily returns of New York stock
indexes.
Keef and Roush [10,11] examined the weather effect
on the returns of New Zealand financial securities
using three local weather factors : cloud cover ,
temperature and wind.
In this paper, we improve the above studies in two
points of view. First, we define weather variable using
a new method proposed by Yoon and Kang [17].
3. Data and methodology
We consider the daily weather data for temperature,
humidity, and sunshine duration in Shanghai from
January 1996 to December 2007, obtained from the
China Meteorological Administration
(http://www.cma.gov.cn).
GARCH(1,1)
Where stochastic error εt is normally distributed; ht is
conditional variance ; all parameters(ω, α and β)
must be positive; the sum of α+β < 1 quantifies the
persistence of shocks to volatility.
4. Empirical results
5. Conclusions
In order to examine the weather effect, extreme
weather condition dummies were generated by using
the 21-day and 31-day moving average and moving
standard deviation.
The dummies were included in the linear model and
GARCH(1,1) model for sample return series and their
volatility, respectively(分別).
Two key results regarding the weather effects on the
returns and volatility of the Shanghai stock market
were provided by the empirical analysis conducted.