Can You Feel the Heat? Extreme Temperatures, Stock Returns, and Economic Sentiment

Can fluctuations in climate affect economic activity by altering beliefs about the economy? Using new data on subjective well-being and economic sentiment, this paper documents a causal effect of extreme temperatures (below 15 and above 85 degrees Fahrenheit) on beliefs about current and future national economic growth. The identification strategy exploits the exposure of observationally equivalent individuals to daily fluctuations in county temperature between 2008 and 2016. These effects are concentrated among higher skilled individuals who face greater cognitive demands in their job. Moreover, these effects on sentiment propagate into asset prices. In particular, temperature also affects the marginal investor by reducing stock returns on days that are very cold or very hot. These results suggest that increased climate variability could raise the amount of non-fundamental risk in the market