We look at a study that suggests pleasant weather can reduce market volatility. The authors analysed how volatility on the Nikkei responded to Japanese monetary policy announcements in different weather conditions and found a correlation. While far from conclusive, the study indicates how investors may leverage such insights to develop trading strategies, capitalising on mood-driven market reactions to monetary policy news.

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The study examines the impact of Japan’s Monetary Policy Meeting (MPM) releases on the Nikkei 225 Volatility Index and related futures contracts during pleasant and unpleasant cold or hot weather. The key findings are:

• During pleasant weather, there is a significant decline in Japanese equities’ implied volatility and futures following MPM releases. This decline lasts about 10 minutes for the Nikkei 225 VI and 5 minutes for futures contracts. The decline in implied volatility is more pronounced and lasts longer during unpleasant cold weather compared to pleasant weather.
• A trading strategy that involves taking a short position at the start of the trading day on pleasant days and closing it at the end of the trading day can generate an average annual return of 5.6%. During unpleasant weather (both hot and cold), the same strategy would lead to significant losses.