Stock returns and weather: The case of European listed energy firms (2020)

The influence of weather conditions on stock markets has been primarily studied within the framework of behavioral finance. By using an extended CAPM applied to weather conditions for European energy companies, we show that information related to weather conditions has little influence on returns and highlights a significant market inefficiency due to a weather condition lag effect. We find that the error between expected and observed returns decreases on average by 20% when using the extended CAPM for weather conditions compared to the traditional CAPM. With the increasing variability of climate, these results should encourage analysts to consider the impact of weather conditions on the stock returns of the 70% of companies exposed to weather conditions.