The Impulse Response Functions of Stock Market Returns to Temperature and Precipitation Innovations

This study investigates how returns on the CRSP value-weighted index and other 16 industries respond to the temperature and precipitation innovations. The current study uses the vector autoregression (VAR) to analyze monthly data of the temperature and precipitation indices obtained from the National Climatic Data Center (NCDC) and returns on the CRSP value-weighted index and other 16 industries from 1926:M7 to 2011:M12. Based on the 12-month horizon, the response of the returns on the CRSP value-weighted index to precipitation innovations is mostly positive; the response is only negative in the 4th, 5th and 11th months. The response of returns on the CRSP value-weighted index to the temperature innovations is mostly negative; the response is only positive in the 1st, 4th and 9th months