Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relation between morning sunshine at a country's leading stock exchange and market index stock returns that day at 26 stock exchanges internationally from 1982-97. Sunshine is strongly positively correlated with daily stock returns. After controlling for sunshine, other weather conditions such as rain and snow are unrelated to returns. If transactions costs are assumed to be minor, it is possible to trade profitably on the weather. These results are difficult to reconcile with fully rational price-setting.

/pdf/good-day-sunshine-stock-returns-and-the-weather-34a23acu6z.pdf

Good Day Sunshine: Stock Returns and the Weather

Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relationship between morning sunshine in the city of a country's leading stock exchange and daily market index returns across 26 countries from 1982 to 1997. Sunshine is strongly significantly correlated with stock returns. After controlling for sunshine, rain and snow are unrelated to returns. Substantial use of weather-based strategies was optimal for a trader with very low transactions costs. However, because these strategies involve frequent trades, fairly modest costs eliminate the gains. These findings are difficult to reconcile with fully rational price setting.

/pdf/good-day-sunshine-stock-returns-and-the-weather-4mv9r26yz5.pdf

http://www.ekonometria.wne.uw.edu.pl/uploads/Main/Madhavan.2000.pdf

Market microstructure: A survey

The sources of trading friction are studied, and simple, robust empirical measures of friction are provided. Seven distinct measures of trading friction are computed from transactions data for 1,706 NYSE/AMSE stocks and 2,184 Nasdaq stocks. The measures provide insights into the magnitude of trading costs, the importance of informational versus real frictions, and the role of market structure. The degree to which the various measures are associated with each other and with trading characteristics of stocks is examined.

Presidential Address: Friction

https://www.cis.upenn.edu/~mkearns/finread/bias-spatt-survey.pdf

Market microstructure: A survey of microfoundations, empirical results, and policy implications

We use futures transaction data to investigate cross-sectional relationships between market-maker inventory positions and trade activity. The investigation documents strongly that traders control inventory throughout the trading day. Despite this evidence of inventory management, typical inventory control models are contradicted by our data. These inventory models predict that market-maker reservation prices are negatively influenced by inventory. Surprisingly, our evidence shows, as a strong and consistent empirical regularity, that correlations between inventory and reservation prices are positive. We interpret the evidence as consistent with active position taking by futures market floor traders. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Life in the Pits: Competitive Market Making and Inventory Control

The quality option implicit in futures contracts

Implicit delivery options and optimal delivery strategies for financial futures contracts

We use futures transaction data to investigate cross- sectional relationships between market maker inventory positions and trade activity. The investigation documents strongly that traders control inventory throughout the trading day. Despite this evidence of inventory management, typical inventory control models are contradicted by our data. These inventory models predict that market maker reservation prices are negatively influenced by inventory. Surprisingly our evidence shows, as a strong and consistent empirical regularity, that correlations between inventory and reservation prices are positive. We interpret the evidence as consistent with active position taking by futures market floor traders

Steven Manaster

Papers

Life in the Pits: Competitive Market Making and Inventory Control

The quality option implicit in futures contracts

Implicit delivery options and optimal delivery strategies for financial futures contracts

Life in the Pits: Competitive Market Making and Inventory Control