J Bioecon (2012) 14:129–146

DOI 10.1007/s10818-011-9107-z

Weather, investor irrationality and day-of-the-week

anomaly: case of Indonesia

Rayenda Khresna Brahmana · Chee-Wooi Hooy ·

Zamri Ahmad

Published online: 20 May 2011

© Springer Science+Business Media, LLC. 2011

Abstract Finance is based on rational behavior assumption. Thus, the existence of

day-of-weekend anomaly in the market can be the anti thesis of the assumption. Much
research suggested the role of psychology as the explanation of this anomaly. How-
ever, it is rare to find a research investigating the relationship between psychology and
day-of-week anomaly (DOWA). As one of the psychology factors is weather-induced
mood, this research aims to investigate the relationship between weather cycle and
DOWA. This paper used Indonesia average temperature level from 1999 up to 2009
for determining the proxy of moods; and found temperature level does not explain
the market returns movements. Temperature level influences the DOWA implying
the moods of investor establish the irrational behavior of the market. This result can
be used as the explanation of irrationality behavior of investor on Monday. Further
research is needed in term of investigating the relationship between psychology fac-
tors (need for cognition, heuristic bias, information ignorance, and other factors) and
investor behavior.

Keywords Irrational behavior · Day-of-the-week anomaly · Weather · Indonesia

JEL Classification D03 · G14

1 Introduction

Day-of-the-week anomaly (hereafter DOWA) is an anomalous condition in stock

market where the returns in certain days are dispersing highly compared to other days
where it points to the irrationality of investor in trading. This anomalous condition

R. K. Brahmana (B) · C.-W. Hooy · Z. Ahmad

Finance Cluster, School of Management, Universiti Sains Malaysia,
11800 Minden, P.Penang, Malaysia
e-mail: raye_brahm@yahoo.com

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130 R. K. Brahmana et al.

violates the main assumption in finance, which is rational behavior (see Dimson and
Mussavian 1998; Malkiel 2003). This argument entails the inability of conventional
finance to explain the phenomenon.
Much research in DOWA such as Abraham and Ikenberry (1994); Clare et al. (1995);
Berument and Kiymaz (2001); Wong et al. (2006), and Yahyazadehfar et al. (2006)
address the investor behavior as the explanation of anomalous condition in the mar-
ket. In their conclusion and limitation section, these mentioned researches offered to
investigate further the role of investor behavior in DOWA. Thus, a research examining
the DOWA in psychology point of view is still rarely found.
Our pre investigation found that the average temperature in Monday is hotter than
other days (see Fig. 1.1). It shows that “bad weather” is more often to occur on Mon-
day than other days. It is strengthened by Forster and Solomon (2003) who found
that there is weekend effect in global weather. Their findings demonstrate that Satur-
day to Monday weather is relatively hotter than other days. This is consistent with the
DOWA concept where Monday stock returns are relatively dispersing higher than other
days.
Now we look further to the intercession between weather and DOWA. We have
three indications here. First, DOWA occurs mostly on Monday. Second, empirical
result shows that there is weather anomaly during Monday. Then finally, weather is a
mood attribution. Therefore, we can hypothesize that there is a relationship between
DOWA and weather condition because the Weather anomaly affects the mood in
trading during Monday.
This paper examines whether the weather, which is the proxy for moods, can explain
the investor irrationality in the market, which is shown by the day-of-the-week anom-
aly (DOWA). This study is different from other studies in three ways. First, our study
investigates the day-of-weekend anomaly by using weather explanation. This will
be its contribution to the current body of knowledge. As already earlier mentioned,
research in DOWA suggested investigating further the role of psychology in stock mar-
ket; it seems that no research investigated that relationship. Second, not like Saunders
(1993), Kramer and Runde (1997), Hirshleifer and Shumway (2003), Pardo and Valor
(2003), Tufan and Hamarat (2004), Cao and Wei (2005), Goetzmann and Zhu (2005),
and Dowling and Lucey (2004), this research was conducted in tropical country where
the temperature level should be the same along the year. Moreover, based on our liter-
ature observation in top journal, this research is the first research that testing tropical
country. Lastly, we employed the average temperature level of Indonesia, not only on
Jakarta’s Weather but also the entire province’s weather. It rationalizes the different
position of investors who spread out all around Indonesia, which criticize by previous
research.
This study addresses the following question: to what extent the relationship between
weather and day-of-weekend anomaly in Indonesia? This paper is organized as fol-
lows: Sect. 1 is the brief introduction; Sect. 2 addresses the literature review. The
research method will be introduced in Sect. 3. Section 4 discusses the findings and
results; Sect. 5 concludes.

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Weather, investor irrationality and day-of-the-week anomaly 131

2 Literature

Rational behavior is the main assumption that distinguished Finance and Economics
from other social sciences (Thaler 1987). This assumption states that every taken deci-
sion has its own purpose and utility. It means that when the economics participants
are confronted with a choice that affects him/her personally, there are nearly always
benefits and costs associated with each choice.
In other hands, several scholars believe that human is affected by their psychology
condition in making bias decision. For example, Isen et al. (1978) found that people
tend to do shopping in a happy mood. Bray and Savin (1986) investigated whether
agents can learn how to form rational expectation. They found that agents, assumed are
Bayesian, failed be taken into rational expectation equilibrium. Hechter and Kanazawa
(1997) also addressed that rational choice is arguable due to human value. In other
words, rational behavior might not suitable to be applied in certain occasion.
Research in DOWA has been extensively conducted in Finance area. It argues the
rational behavior of market participants by showing the Calendar Anomalies. French
and Roll (1986) and Damodaran (1989) examined that information flow over the
weekend. They found that Monday’s variance is more than three times that of other
days of the week. Jaffe et al. (1989); Abraham and Ikenberry (1994) Sias and Starks
(1995) and Tong (2000) demonstrate that trade-orders on Monday are conditional on
the previous week or Friday’s return.
Abraham and Ikenberry (1994) investigated the DOWA in NYSE and ASE. They
took the CRSP equal weighted index by weekday over the period of 1963–1991.
They examined the individual investor trading behavior during certain days against
the market returns. The crux of Abraham and Ikenberry is that even though inves-
tors have fundamental information regarding the market, they keep jumping into the
market speculatively. Consequently, they pressured the market on Monday in random
decision.
Recently, Yahyazadehfar et al. (2006) examine day-of-the-week effect during the
period 27 March 1998 until 17 March 2005. They employed several robust statistical
tests such as CLR, ARCH, and GARCH and found the DOWA in TSE. They addressed
also the speculative behavior of investor as the causes of the anomaly.
The essence of prior research is that trading behavior of investor plays role on the
anomaly. This is aligned with DeBondt and Thaler (1995) who addressed that a good
finance theory has to be based on the evidence of the participants’ psychology. In this
research, we gauge the moods as the explanation factor in DOWA.
Mood has influenced the economic behavior (see Lo and Repin 2001; Rick and
Loewenstein 2004). Schwarz and Clore (1983) found that people receive greater satis-
faction when weather was sunny than when weather was reported rainy. Howarth and
Hoffman (1984) address research on the weather and mood as “weather variables affect
an individual’s emotional state or mood, which creates a predisposition to engage in
particular behaviors” (p. 15). It can be concluded that good weather induces positive
mood states and bad weather induces negative mood states.
In a recent study, Hansen et al. (2008) examine the role of high temperature to men-
tal, behavioral, and genitive disorders. By estimating hospital admission and mortali-
ties attributed to mental, behavior, and cognitive disorder in the period of 1993–2006,

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they suggest that high temperature pose a salient risk to mental health. The result is
aligned with previous result which also stated that high temperature has relationship
to mental health (Basu and Samet 2002; Kovats and Ebie 2006).
In finance literature, the relationship between weather (the proxy of moods) and
financial market has been documented in much research. For instance, Saunder’s work
(1993) found a relationship between the cloud cover level in New York and the equity
returns in New York. Saunders (1993) found when the level of cloud cover was 100%,
the stock returns were significantly below average, and when the cloud cover level was
0–20%, the stock returns were significantly above the average. Replicating Saunders’
work, Hirshleifer and Shumway (2003) documented the same result within broader
market and longer period. Pardo and Valor (2003) found the effect of weather on
the financial markets by affecting the behavior of market traders. Kramer and Runde
(1997), Kamstra et al. (2000), and Tufan and Hamarat (2003) found positive relation-
ship between weather condition and stock market return. Thus, a study that investigated
the link between moods and market anomaly is hard to find.
Interestingly, Forster and Solomon (2003) found weekend effect in global tem-
perature. By using surface measurement of maximum and minimum temperatures
from Global Daily Climatological Network data set, they found that many stations in
the world such as US, Mexico, Japan, and China have high temperature level from
Saturday to Monday. This is in line with DOWA where the return on Monday is
usually relatively higher negative compared to other days. Figure 1 also confirms this
relationship.

Fig. 1 The frequency distribution in certain day. Source: Indonesia Meteorology Office Agency

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Weather, investor irrationality and day-of-the-week anomaly 133

Depicted in Fig. 1, the temperature on Monday is relatively higher than that of

other days. The range of the temperature on Monday is raised from around 26◦ C up
to around 33◦ C. Meanwhile, the other days’ temperature range is in between 16◦ up
to 30◦ C. It implies that Monday is relatively hotter than other days on average.
As earlier mentioned, weather condition affects the mood in decision making (refer
to Basu and Samet 2002; Kovats and Ebie 2006; Hansen et al. 2008). It might generate
biased decision or irrational behavior. Weather condition is also found affecting the
investor’s rational decision (see Saunders 1993; Hirshleifer and Shumway 2003).
Interestingly, Forster and Solomon (2003) found there is weekend effect in global
temperature, whereas Saturday to Monday temperature is relatively hotter than other
days. It is confirmed by Fig. 1. In finance, the similar phenomenon is also found and
called as DOWA. It shows that the returns on Mondays are relatively higher negatively
than other days. If we link these theories, it can be proposed that the DOWA is caused
by the weather condition. Therefore, this research hypothesizes that

Ha : There is significant relationship between weather condition and day-of-

week anomaly.

3 Methodology

3.1 Procedures

We used temperature for weather measurement as there was no general consensus of

weather proxy. Early research in weather relationship to market returns used Clouds
Cover as the measurement (see Saunders 1993; Kramer and Runde 1997). Some
research used humidity and sunshine hours (Pardo and Valor 2003), but most recent
studies used temperature as the proxy of the weather (see Cao and Wei 2005; Chang
et al. 2006; Jacobsen and Marquering 2008).
Temperature is the final outcome of all weather interaction. If the clouds cover is
80%, but wind speed is low and humidity is high, it will result in two probabilities: hot
temperature and mediocre temperature. It is also the same if the clouds cover is 20%,
but the wind speed is high and humidity is low. It will also result in the two probabil-
ities. In the end, only temperature can answer whether it is hot or not hot. In further
research, temperature is more closely associated to Good or Bad Weather Perception
(see Matzarakis et al. 1999). However, there is no general consensus empirically that
states temperature overcomes the others as Weather Measurement.
The paper conducted several phases to investigate the role of weather on the DOWA.
We used and modified French’s DOWA (1980) model as the basic model. The model
is based on the event study of market model. To eliminate the variance errors, we
controlled the equation by adding the lag-one returns. This procedure is duplicating
Berument and Kiymaz (2001) model which placed the random walk model as the
control variable.
This study conducted several tests to ensure the robustness of the results. First,
we investigated the role of weather on DOWA by straightforward interaction
(see Eq. 3). Then, we tested it again by amending the model into high and low

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temperature (see Eqs. 4 and 5). Finally, we just employed the Monday return regression
to the Monday temperature (see Eq. 6).

3.2 Empirical model

First, we introduce the French’s (1980) model. The model is popularly used in DOWA
research. It eliminates the Monday Dummy to avoid the dummy trap because there
are more than three dummies in the variables. It is in line with Gujarati and Porter
(2009) who state that if there are more than three dummies, intercept can be used as
the explanation as far as there is no other variable dimensions. The model is

Rt = α + γ1 dT ue,t + γ2 dW ed,t + γ3 dT hu,t + γ2 d Fri,t + εt (1)

where Rt is Return of the stock at t-time; dT ue,t , dW ed,t , dT hu,t , d Fri,t are Tuesday
dummy, Wednesday Dummy, Thursday Dummy, and Friday Dummy, respectively.

3.3 Weather and market returns

We introduce first the basic model of the relationship between Weather condition and
Market returns which is derived from Saunders (1993). However, this research modi-
fies the model following Goetzmann and Zhu (2003) by adding three control variables,
namely January Dummy, Monday Dummy, and Lag-One Return. The purpose is to
diminish the variance errors of the model. The model is

Rm,t = α + γ1 T emperatur et + γ2 J anuar y2 + γ3 Monday + γ4 Rm,t−1 + εt (2)

3.4 Weather and DOWA model

This study modifies Eq. 1 by adding the Weather interaction. However, if we still
consider the intercept as the Monday Effect, we cannot put the interaction of Monday
Weather. Therefore, this study brings back the Monday Dummy, but faces the dummy
trap issue. According to Gujarati and Porter (2009), the alternative way to overcome
the dummy trap is by dropping the intercept of the model. Dropping the intercept of
the model will avoid the perfect collinearity. Therefore, our model will be

Rm,t = γ1 W eather1 ∗ D1 + γ2 W eather2 ∗ D2 + γ3 W eather3 ∗ D3

+γ4 W eather4 ∗ D4 + γ51 W eather5 ∗ D5 + Rm,t−1 + εt (3)

where D1 , D2 , D3 , D4 , and D5 , are Monday Dummy, Tuesday Dummy, Wednesday

Dummy, Thursday Dummy, and Friday Dummy respectively. W eather1 , W eather2 ,
W eather3 , W eather4 , and W eather5 are Monday Weather, Tuesday Weather,
Wednesday Weather, Thursday Weather, and Friday Weather, respectively. Rm,t is
the market returns in period t. Rm,t−1 is the market returns in lag one period. This
study employs this model to investigate the association between Weather and DOWA.

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Weather, investor irrationality and day-of-the-week anomaly 135

Our second confirmation model is depicted in Eqs. 4 and 5. The models suggest
that there is significant relationship between extremely high and low temperature day
and DOWA. The highest 25% temperature is the 1 value dummy of high temperature.
The Lowest 25% temperature is the 1 value dummy of low temperature. The result
of model 4 should be a significantly positive relationship. Meanwhile, the result of
model 5 should be a significantly negative relationship. The models are

∗ ∗ ∗ ∗
Rm,t = γ1 HT emp1 D1 +γ2 HTemp2 D2 +γ3 HTemp3 D3 +γ4 HTemp4 D4
∗
+γ5 HTemp5 D5 +Rm,t−1 +εt (4)
Rm,t = γ1 LTemp1 ∗ D1 +γ2 LTemp2 ∗ D2 +γ3 LTemp3 ∗
D3 +γ4 LTemp4 ∗
D4
∗
+γ5 LTemp5 D5 +Rm,t−1 +εt (5)

where H T emp1 , H T emp2 , H T emp3 , H T emp4 , and H T emp5 are the dummy vari-
ables of extreme high temperature of 25% highest on Monday, Tuesday, Wednes-
day, Thursday, and Friday, respectively. L T emp1 , L T emp2 , L T emp3 , L T emp4 , and
LTemp 5 are the dummy variable of extreme low temperature of 25% lowest in Monday,
Tuesday, Wednesday, Thursday, and Friday, respectively.
The last robustness check in this research is shown by Eq. 6. It captures the rela-
tionship in a unique way. First, this study calculates the Monday returns by the normal
logarithm of Closing Price in Monday divided by Opening Price in Monday. Then,
we regress it with the average Monday temperature. It is calculated by the average of
Maximum Temperature and Minimum Temperature. The model is

R Mon C/O,t = α + δ3 W eatherm,t + R Fri ,t + εt (6)

where R Mon C/O,t is the normal logarithm return of closing price and opening
price in Monday. R Fri ,t is the Friday return. Weather is the average temperature in
Monday.

3.5 Data

The samples in this research are market returns of Indonesia Stock exchange and
average temperature level in Indonesia. The period is from 1 January 1999 until 31
December 2009 daily basis. The data of market returns are retrieved from Thomson Da-
tastream. Meanwhile, the temperature level is collected from Indonesia Meteorology
and Geophysics Bureau. To obtain a reliable sample, the temperature level calculation
is done different from previous research (Saunders 1993; Kramer and Runde 1997).
The sample has been taken from Maximum Temperature and Minimum Temperature
average values of all Indonesia climate station.

3.5.1 Descriptive results

This section describes the statistical results of testing the hypothesis that temperature
level is associated with the DOWA. Our first result is the descriptive result giving the

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portraits of temperature level effect on investor behavior. The classic assumptions

which are heterokesdaticity, multicolinearity, and autocorrelation were conducted
before testing the regression. Thus, due to the words and pages limitation, the re-
sults of those tests are not put in this paper (Table 1).
The descriptive results show three important issues. First, the mean returns on
Monday are negative. Meanwhile, other days have positive mean returns. It indicates
the DOWA. Second, the temperature level on Monday has larger standard deviation.
It means the temperature level on Monday is highly dispersed compare with that of
others. The last important issue is regarding the maximum and minimum level of
temperature. The temperature level on Monday has the broadest spread among the
others. It indicates the temperature level may affect the rational behavior of a market
player.

4 Results

4.1 Proving the DOWA in Indonesia

The daily returns of Indonesia Stock Exchange are used to examine whether the returns
are generated in calendar time. Under the calendar time hypothesis, the expected mar-
ket returns are the same for each day. Moreover, this hypothesis postulates that if
certain days have high return, the following day should also have high return. Nev-
ertheless, our findings show contrary result to this hypothesis and able to claim the
existence of DOWA.
First, we examine the DOWA based on descriptive figures. Illustrated in Fig. 1, It
portrays the returns of Monday are mostly in negative region, while the returns of other
days are mostly in the null or positive region. It also depicts that the market returns
was not constant through the week nor that they have the same level of return. Rather
it shows that they have not only negative returns for Monday but also that Monday
has lower returns on average compared with other days. This indicates the Monday
Effect of DOWA.
Further, this paper double-checked the existence of DOWA by running the regres-
sion of French (1980) model or Eq. 1. The result of the regression indicates there is
DOWA in Indonesia. As can be seen in Table 2, the intercept of the model is signif-
icant and negative. Meanwhile, the dummy of Tuesday, Wednesday, Thursday, and
Friday is significantly positive. It implies there is DOWA in Indonesian stock mar-
ket. In other words, the anomalous condition implies the irrationality of the investor in
Indonesian Stock Market. This is consistent with Wong and Yuanto (1999) and Basher
and Sadorsky (2006).

4.2 The result of the relationship between weather condition and market returns

After finding the existence of DOWA in Indonesian stock market, the next phase is
to gain comprehensive understanding of the relationship between temperature level
and market returns. If there is a relationship between temperature level and market

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 Table 1 Descriptive statistic

Monday Tuesday Wednesday Thursday Friday

Returns Temp. Returns Temp. Returns Temp. Returns Temp. Returns Temp.

Obs. 468 468 468 468 468 468 468 468 468 468
Mean −0.00128 28.76432 0.001236 28.70584 0.000902 28.71026 0.001592 28.74256 0.002183 28.6723
Median 0 28.875 0.0005 28.75 0.00103 28.85833 0.000222 28.8 0.000661 28.75
Maximum 0.113017 31.4 0.055013 31.3 0.04543 31.15 0.072258 31.2 0.07163 31.35
Weather, investor irrationality and day-of-the-week anomaly

Minimum −0.10357 23.8 −0.043643 24.36667 −0.064351 24.9 −0.059361 25.1 −0.04028 24.36667
SD 0.017273 0.999089 0.01322 1.072317 0.014405 1.009024 0.013949 1.052381 0.013124 1.070198
Skewness −0.28279 −0.517296 0.283997 −0.645053 −0.20713 −0.519495 0.198414 −0.511753 0.682661 −0.809655
Kurtosis 11.82955 3.54462 4.567074 4.055325 4.726956 3.41889 5.666416 3.399733 5.979844 4.782905

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Table 2 Result of DOWA regression

Intercept d2 d3 d4 d5

Indonesia −0.001973*** 0.002755*** 0.002478*** 0.00331*** 0.004341***

Note: means significant in 1% level

Table 3 Relationship between market return and temperature level

Coefficient SE t-Statistic Probability

C 0.002267 0.0016 1.4402 0.1499

TEMP −5.94E−05 0.0001 −1.0919 0.2750
JANUARY 4.33E−05 0.0005 0.0931 0.9258
MONDAY −0.001245 0.0003 −3.8714 0.0001
RMIN1 0.118202 0.0205 5.7770 0.0000
R 2 : 0.020362
Durbin–Watson: 1.991117
Observation: 2,869
Note: TEMP is the temperature, JANUARY is the January Effect, MONDAY is the Monday Effect, and
RMIN1 is the one-lagged day daily return

returns, it can be concluded that moods actually made the price, not the rational
behavior beyond the price making. Because the weather significantly influences the
price, then weather is a price maker, not an anomaly maker. To prove this hypoth-
esis, we employed Eq. 2 to examine the relationship between weather and market
returns.
Table 3 shows that temperature has no impact on market returns. The regression
model shows the probability of temperature degree is higher than the accepted prob-
ability in significance level of 5%. It shows that the hypothesis of the influences of
temperature level on market returns is not rejected in partial regression indicating the
temperature level has no effect on investors’ moods. Further, it also signifies that the
Indonesian market returns can discard the influences of temperature and place investor
rationalization as the reason on market returns.
As a quick conclusion, the market returns in Indonesian market are not affected
by the weather condition. It also indicates the market returns in Indonesian market is
traded not because of the temperature level. This regression result does not align with
previous studies where it remarked the significant relationship between market returns
and temperature (Saunders 1993; Cao and Wei 2004). However, our results supports
the studies of Pardo and Valor (2003); and Tufan and Hamarat (2003) who argue that
market returns are not affected by temperature level.
As Figs. 2 and 3 indicate there is a relationship between stock market and tem-
perature, we investigate further the relationship between certain condition in stock
market and temperature level. This is also in line with the aims of investigating the
relationship between temperature level and DOWA. It will be discussed in detail in
the next section.

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Fig. 2 Market returns on daily basis

Fig. 3 Temperature level in daily basis

4.3 Results of the relationship between weather condition and DOWA

After discovering that there is no significant association between weather condition

and market return, the intriguing result that depicted by the Fig. 1 confer us to pro-
ceed to the next investigation. This section examines the relationship between the
temperature level and DOWA by employing regression test. The purpose is to inves-
tigate the explanation of DOWA in terms of moods and confirms the contradictive
result between the regression result and descriptive result. To investigate this issue,
we employed model 3 where we regress the market return in weekly basis within

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Table 4 The relationship between temperature and DOWA

Variable Coefficient t-Statistic Probability

MONTEMP −2.41E−05 −2.40896 0.01610

TUETEMP 1.69E−05 1.683622 0.09240
WEDTEMP 8.18E−06 0.831172 0.40600
THUTEMP 1.77E−05 1.760048 0.07850
FRITEMP 3.39E−05 3.374737 0.00080
RMIN1 0.120092 5.85238 0.00000
R 2 : 0.096719
Durbin–Watson stat: 1.959651
Observation: 2,869
Note: MONTEMP is the Monday Temperature, TUETEMP is the Tuesday Temperature, WEDTEMP is
Wednesday Temperature, THUTEMP is the Thursday Temperature, FRITEMP is the Friday Temperature,
RMIN1 is the one-lagged daily return

1 21 41 61 81 101 121 141 161 181 201 221 241 261 281 301 321 341 361 381 401 421 441 461

Fig. 4 Logarithmic graph of Monday returns and Monday temperature Level. Note: The upper line is
the logarithmic scale graph of market returns; meanwhile the lower line is the logarithmic scale graph of
temperature level

calendar anomaly dummy and temperature level. If model 3 finds there is a statisti-
cally significant relationship, it indicates the temperature level does affect the DOWA.
A dramatic difference of findings is shown Table 4. The result of regression indi-
cates that DOWA is affected by temperature level significantly at 1% significant level.
It might be remarked that it is the temperature level affecting the rational behavior
and causes the DOWA. It also signifies that the irrational behavior causing DOWA is
affected by the Moods of investors.
The result is strengthened by the logarithmic graph of Monday returns and Monday
temperature level. As depicted on the Fig. 4, the movement of the logarithm frequency
of Monday returns is aligned with the frequency of Monday temperature level. Again,
based on the figures, it can be concluded the Monday returns is integrated to Monday
temperature level logarithmically.

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Table 5 The relationship between extremely high weather condition and DOWA

Variable Coefficient t-Statistic Probability

MONHTEMP −3.16E−05 −2.2008 0.0278

TUEHTEMP 3.67E−05 1.9121 0.1560
WEDHTEMP 1.87E−05 1.1151 0.2649
THUHTEMP −1.02E−05 −0.6418 0.5210
FRIHTEMP 2.59E−05 1.5749 0.1154
RMIN1 0.119899 5.8499 0.0000
R 2 : 0.16375
Durbin–Watson stat: 1.990103
Observation: 2,869
Note: MONHTEMP is Monday Highest Temperature, TUEHTEMP is Tuesday Highest Temperature,
WEDHTEMP is Wednesday Highest Temperature, THUHTEMP is Thursday Highest Temperature, FRIH-
TEMP is Friday Highest Temperature, and RMIN1 is the one-lagged day returns

One may argue that the anomaly associated with the weather is driven by extreme
condition of the weather. For example, the weather condition in Monday is extremely
hot or extremely cold and caused the anomaly. This situation is in line with the Fig. 1
where the weather in Monday is relatively higher compared to other days. To gauge
this issue, we did robustness check by using the interaction of calendar hypothesis and
temperature.

4.4 Robustness check

4.4.1 Extreme weather condition and DOWA

Hence, the crucial question is whether the weather really affects the investor behavior
causing the DOWA. To answer this question, we employed Eqs. 4 and 5 by gauging
the extreme weather with the anomaly, whereas Tables 5 and 6 show the relevant
results.
Table 5 reports the extremely hot temperature effects on the anomaly. It shows that
DOWA is substantially influenced by the 25% highest temperature at 5% significant
level. The relatively good R squared result implies the model is acceptable, especially
added by the Durbin–Watson result which is almost equal to two. Further, Table 5
presents that the extreme temperature does not influence the other days. The changes
in moods award the random decision making that might cause the anomaly in the mar-
ket. This result also confirms the linearity with Forster and Solomon (2003) findings
for weather calendar anomaly. Our findings also strengthen the correlation between
Weather and Week Effect of Jaffe and Westerfield (1985); and enrich the behavioral
finance literature by surmising there is indeed the role of weather-induced mood on
the DOWA.
Consistent with previous findings, Table 6 confirms the role of extreme weather
condition on the DOWA. We took the 25% lowest temperature for the Eq. 5. For the

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Table 6 The relationship between extremely low weather condition and DOWA

Variable Coefficient t-Statistic Probability

MONLTEMP −4.24E−05 −1.8462 0.0650

TUELTEMP 8.44E−06 0.3780 0.7055
WEDLTEMP 9.81E−06 0.4248 0.6710
THULTEMP 1.08E−05 1.7140 0.1867
FRILTEMP 1.00E−05 1.7223 0.1851
RMIN1 0.118599 5.7855 0.0000
R 2 : 0.15118
Durbin–Watson stat: 1.995845
Observation: 2,869
Note: MONLTEMP is Monday Lowest Temperature, TUELTEMP is Tuesday Lowest Temperature, WEDL-
TEMP is Wednesday Lowest Temperature, THULTEMP is Thursday Lowest Temperature, FRILTEMP is
Friday Lowest Temperature, and RMIN1 is the one-lagged day returns

Monday anomaly, it shows the significant interaction between the calendar hypothesis
and 25% lowest temperature. Interestingly, the relationship among these variables is
inverse association, which is different with the 25% hottest temperature.
Concisely, extreme weather condition is proven to be one of the determinants in
investor behavior. The most convincing explanation for the findings is the environmen-
tal psychology approach, a study about the role of environment in human behavior.
Scholars in this area such as McAndrew (1993) pointed out that lack of sunlight makes
people melancholic and upset. Further, Bell et al. (2003) addressed the Summer Effect
where people feel impatient or angry when the temperature is over 84◦ F. Moreover,
their findings also depicts that, unlike the hot temperature, the coldness does give upset
behavior. In this sense, the Weather anomaly that found by Forster and Solomon (2003)
and our descriptive findings of higher temperature during Monday does really shape
the behavior of investor during Monday. This irrationality during Monday is the cause
of DOWA. However, we keep proceeding the investigation in details by exploring the
role of Monday temperature on Monday returns. Therefore, we use Eq. 6 to examine
and next section will demonstrate the result.

4.4.2 Monday: weather and returns

In evaluating the role of weather on market anomaly, there is another question to

address: “Is Monday a day where investor experiences the weather-induced irratio-
nality?” One may argue whether it is true the weather on Monday affects investor
behavior and causes the DOWA. For example, the weather fluctuation may coincide
with market activities, but that coincidence does not allow any conclusions about cau-
sality. To avoid this problem, we employed Eq. 6 to avoid this issue. The model is
derived from market model of random walk. We modified the established model of
Saunders (1993) by forming the returns using closing price and opening price. Our
justification is the weather condition only influences in that day and no effect in the

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Weather, investor irrationality and day-of-the-week anomaly 143

Table 7 Monday returns and weather condition

Variable Coefficient t-Statistic Probability

C 0.000567 3.9369 0.0001

MONTEMP −4.37E−05 −3.9142 0.0001
Friday 0.117453 5.7455 0.0000
R 2 : 0.019974
Durbin–Watson stat: 1.989329
Observation: 2,869
Note: MONTEMP is Monday Temperature, and Friday is the Friday return (log normal of closing price
divided by opening price)

next day. Moreover, the data set provided by Meteorology Office is daily basis data
set. We introduce closing price of Friday as the control of variance errors.
Similar findings are observed in Monday data set, as shown in Table 7. There is a
significant relationship between the returns in Monday and its temperature level. The
sign of coefficient result is negative indicating the inverse relationship. This is in line
with environmental psychology literature where the hotter temperature triggers anx-
iety and anger. These types of behavior encourage the heavy selling trading session.
Indeed, it causes the DOWA.
Since the Monday data set confirms our findings, it can be concluded that weather
condition has effects on the DOWA. The Weather anomaly during Monday is aligned
with the Stock market anomaly. It implies the moods fluctuation of investor confers
the random behavior in stock market. Therefore, we claim that weather condition,
especially temperature level, has significant effect in causing the DOWA.

5 Conclusion

Finance is based on two big assumptions which are (1) normally distributed and (2)
rational behavior. These assumptions underlie major finance theories such as CAPM,
EMH, Black-Scholes, and VaR. Thus, the existence of calendar anomalies in the market
can be the anti thesis of the rational behavior assumption. The psychology factor such
as weather-induced moods can be the explanation of the market anomalous condition.
This paper highlights the association between the tropical temperature level and
DOWA. The results show the temperature level does not explain the market returns.
Instead of it, the temperature level affects the decision of investor in certain day through
mood, and cause the anomaly. Prior study and our descriptive result show the temper-
ature level during Monday is higher than other days, while we found also the DOWA
in Indonesia. The latter, we constructed empirical model to explore this phenomenon.
The empirical model is a modified model of French (1980) and Saunders (1993). Inter-
estingly, our empirical models results successfully explain the relationship between
Weather Anomaly and Weekend Anomaly. We conducted our research in several pro-
cedures to see the relationship between weather condition and DOWA. First, we found
the evidence of DOWA in Indonesian stock market by utilizing French’s (1980) model.

123
144 R. K. Brahmana et al.

Further, similar to French results, we found also the Monday effect of DOWA in
Indonesia. It is consistent with prior research such as Wong and Yuanto (1999) and
Basher and Sadorsky (2006). Next procedure is to examine the relationship between
weather and market returns. This research showed that weather has no impact on
market returns signifying that the Indonesian market returns are not affected by the
weather condition. Third, as Fig. 1 confer us to investigate further the contradictive
result between the regression result and descriptive result; we examined the relation-
ship between Weather Condition and DOWA. Interestingly, the result showed the
DOWA is affected by temperature level significantly at 1% significant level. It can be
concluded the Monday returns is linked to Monday temperature level.
As robustness check, this research employed two procedures. First, we run a regres-
sion which revealing the role of extreme weather on DOWA. In a brief, the findings
showed that extreme weather condition is proven to be one of the determinants in
investor behavior. This result is in line with Forster and Solomon (2003) findings for
weather calendar anomaly. Moreover, our findings also confirm McAndrew (1993) and
Bell et al. (2003) who stated that extreme weather has effects on human behavior. The
next robustness check is evaluating the role of weather on market anomaly by taking
only the Monday data series (weather and market returns). Again, our findings showed
the relationship between Monday returns and Monday weather. In a nutshell, we claim
there is significant relationship between weather condition and DOWA. The anoma-
lous condition (DOWA as the proxy) is irrational because it is created by the moods
fluctuation of market players. This result can be used as the explanation of DOWA.
It is noteworthy that Indonesia is a tropical country where the weather condition
is similar throughout the year. Since we found there is anomaly in weather condition
during Monday, the moods of investor might fluctuate differently during the Monday.
In psychology, weather can affect the behavior of human. It will bring human to be
more melancholic, or more upset, or happier. The mood fluctuation brings human to
random decision, where in economics, it is known as irrational behavior. The anomaly
weather condition in Indonesia is found to be conveying the anomalous condition in
the market even though Indonesia is tropical country. In other words, this research
triumph is the findings that state “There is indeed a relationship between Weather
Condition in Monday and DOWA”. Further research is needed in term of investigating
the relationship between other psychology factors (need for cognition, heuristic bias,
information ignorance, and other factors) and investor behavior.

Acknowledgments First author gratefully acknowledges the Fellowship Scheme assistance of Universiti
Sains Malaysia for this research. Most of all, the authors are thankfully for the anonymous reviewers who
gave good comments to improve this research.

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