January 31, 2007

Futures Traders Know Which Way the Wind Blows

 Research by Dr. Peter R. Locke

The wind velocity in the Windy City appears to have a measurable effect on the habits of futures traders at the Chicago Mercantile Exchange (CME). In particular, the strength of the wind in the morning impacts what the traders do in the afternoon.

Futures traders tend to sell relatively more contracts on windy days," says Dr. Peter R. Locke, professor of finance at Neeley/TCU. "And morning wind strength is clearly related to the trading behavior of the floor traders in the afternoon.

Locke and two colleagues, Piman Limpaphayom and Pattarake Sarajoti, both of Sasin GIBA of Chulalongkorn University in Bangkok, Thailand, examined the personal transaction records of 354 highly active traders at the CME from January of 1997 through December of 2001. They also looked at the intra-day weather conditions at Chicago's O'Hare International Airport during the same span. 

The researchers calculated the mean daily wind speeds for each month of the year and determined whether a given day was more or less windy than the average for that particular month. They found that on days that are more windy than the norm, traders tend to sell more often than they buy. They also found evidence of an increase in the effective bid-ask spread on windy days.

The study found that futures floor traders are able to generate more income for their personal accounts on sunny days than on cloudy days.

"Sky cover and wind strength are related to trader income," Dr. Locke reports. "Income is higher and timing is better on sunny days.  Income is also higher on calm days. Our most interesting findings are related to wind strength, especially when we perform intra-day analyses. Morning wind is significantly related to afternoon trade imbalance and income."

"Perhaps," he suggests, "when these traders step out to get a bite to eat or a smoke, a very windy day drives them back inside with a relatively sour disposition, they lose their concentration and as a result have a poor day trading."

The research by Locke, Limpaphayom and Sarajoti is not the first to document that local weather conditions can impact trading behavior at exchanges. Parallel studies have been done by others involving trading on the New York Stock Exchange. This, however, is the first research to examine the impact of the specific variable of wind speed as well as where traders are physically located.

It is yet another bit of evidence that markets display "irrationalities" that are not necessarily explained by basic economic theories.

"Overall our results provide further support to the notion that weather conditions in a specific location can influence traders' behavior in that particular location," says Dr. Locke. 

The researchers' paper, "Gone With The Wind: Chicago's Weather and Futures Trading," will be presented at the Asia Pacific Futures Research Symposium in Shanghai, China in March 2007.



Elaine Cole
Public Relations Manager
Neeley School of Business at TCU