Heat waves and market activity: analyzing the impact of extreme temperature on trading volumes in 5 european markets

Abstract

The global temperature has been increasing in recent years, causing a huge impact on people’s psychology and consequently on the stock market. This study examines the relationship between high temperatures and trading volumes for 5 European countries over the period 2005–2022. Initially, two different methods are analyzed: a binning approach and time-series regressions that control for seasonal trends and various other economic factors. The results of the empirical study indicate that trading volume have the tendency to decrease significantly only on heatwave days. Additionally, from a theoretical point of view, the link of behavioral finance to investors’ decision making is investigated, shedding light on the influence of climate-related events on stock market behavior and contributing to the understanding of the behavioral factors affecting trading volume during extreme weather events.