Impact of multiple weather factors on the UK spread-betting markets

Session Title

Session 2-3-D: Gambling Behavior

Presentation Type

Event

Location

Caesars Palace, Las Vegas, Nevada

Start Date

29-5-2019 1:45 PM

End Date

29-5-2019 3:10 PM

Disciplines

Finance

Abstract

This paper investigates the effect of a range of weather variables on individual spread bettors’ hourly betting volumes and their propensity to bet (bullish/bearish betting sentiment). This is timely research because spread-betting markets, with over 1 million traders in the UK alone, have opened up speculation in financial betting markets to a wide cross section of the public. Many of these retail bettors have little experience of financial market betting, yet spread-betting companies hedge into the underlying markets, exposing these markets to the decisions of less informed bettors. We suspect that the decisions of these less informed bettors might be swayed by factors other than their investments’ underlying economic fundamentals and our unique dataset, consisting of the betting history of almost 1,614 spread bettors, enabled us to test this view.

As a result of the demonstrated linkages between weather, mood and decision behavior, several studies have explored the degree to which weather can influence financial stock returns. However, no general consensus has emerged. One reason for this may be that some previous studies failed to examine the weather variables in the context of others, which could influence the manner in which individuals react. In addition, weather-related factors are often correlated with each other in certain circumstances and this has not been allowed for in some previous studies. Also, the majority of studies examining the relationship between weather-related factors and behavior in financial markets have used aggregated stock return information. This approach prevents a precise identification of those aspects of individual bettors’ betting behavior that are affected by the weather and does not allow us to observe the extent to which there is a variation in the degree to which weather affects the decision behavior of informed and less informed bettors. Our study aims to overcome the limitations of the previous literature indicated above, by examining the extent to which a range of weather variables interact to affect the decisions of individual financial bettors.

Using a methodology which overcomes the limitations of previous research, we found that deseasonalized air temperature, rainfall, and wind speed all significantly impacted betting behavior, in terms of individual spread bettors’ hourly betting volumes and their propensity to bet (bullish/bearish betting sentiment). The biggest effects being related to betting volume. Interestingly, the effects were in opposite directions in the winter and the summer. This may explain why some previous studies have found weak or non-significant effects of weather, as these seasonally mediated effects could cancel themselves out throughout the year.

Keywords

weather effect, betting sentiment, betting volume, spread-betting market

Author Bios

Ming-Chien Sung is Professor of Risk and Decision Sciences in the Centre for Risk Research at the University of Southampton. Her research focusses on modelling behavior in a range of financial markets and she is particularly focused on exploring new approaches for modelling uncertain outcomes. Ming-Chien has presented papers at numerous international conferences and has published a range of papers in leading international journals. She is currently examining the use of both parametric and nonparametric methods for forecasting the outcomes of uncertain events in financial markets.

Johnnie E.V. Johnson is Professor of Decision and Risk Analysis and Director of the Centre for Risk Research at the University of Southampton. He has published widely in the areas of risk perception, risk analysis and decision making under uncertainty. Johnnie’s research focuses on exploring the degree to which information is effectively used in financial markets and the factors which influence the efficiency of, and degree of risk taking in, prediction markets and wider financial markets.

Shaun S. Wang is Assistant Professor of Finance in the School of Business, Macau University of Science and Technology. Shaun’s research has focussed on the effect of weather on risky choices. In particular, his work has examined the impact of a range of weather factors on sentiment, risk taking and engagement in financial markets across the world. His work has been presented at several leading international conferences and he is currently examining the impact of weather on risk taking amongst investors in Hong Kong.

Funding Sources

None

Competing Interests

None

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May 29th, 1:45 PM May 29th, 3:10 PM

Impact of multiple weather factors on the UK spread-betting markets

Caesars Palace, Las Vegas, Nevada

This paper investigates the effect of a range of weather variables on individual spread bettors’ hourly betting volumes and their propensity to bet (bullish/bearish betting sentiment). This is timely research because spread-betting markets, with over 1 million traders in the UK alone, have opened up speculation in financial betting markets to a wide cross section of the public. Many of these retail bettors have little experience of financial market betting, yet spread-betting companies hedge into the underlying markets, exposing these markets to the decisions of less informed bettors. We suspect that the decisions of these less informed bettors might be swayed by factors other than their investments’ underlying economic fundamentals and our unique dataset, consisting of the betting history of almost 1,614 spread bettors, enabled us to test this view.

As a result of the demonstrated linkages between weather, mood and decision behavior, several studies have explored the degree to which weather can influence financial stock returns. However, no general consensus has emerged. One reason for this may be that some previous studies failed to examine the weather variables in the context of others, which could influence the manner in which individuals react. In addition, weather-related factors are often correlated with each other in certain circumstances and this has not been allowed for in some previous studies. Also, the majority of studies examining the relationship between weather-related factors and behavior in financial markets have used aggregated stock return information. This approach prevents a precise identification of those aspects of individual bettors’ betting behavior that are affected by the weather and does not allow us to observe the extent to which there is a variation in the degree to which weather affects the decision behavior of informed and less informed bettors. Our study aims to overcome the limitations of the previous literature indicated above, by examining the extent to which a range of weather variables interact to affect the decisions of individual financial bettors.

Using a methodology which overcomes the limitations of previous research, we found that deseasonalized air temperature, rainfall, and wind speed all significantly impacted betting behavior, in terms of individual spread bettors’ hourly betting volumes and their propensity to bet (bullish/bearish betting sentiment). The biggest effects being related to betting volume. Interestingly, the effects were in opposite directions in the winter and the summer. This may explain why some previous studies have found weak or non-significant effects of weather, as these seasonally mediated effects could cancel themselves out throughout the year.