Air temperature and sovereign bond returns

Kizys, Renatas, Rouatbi, Wael, Umar, Zaghum and Zaremba, Adam (2024) Air temperature and sovereign bond returns. Financial Markets, Institutions and Instruments, 33 (2), 179-209. (doi:10.1111/fmii.12192).

Record type: Article

Abstract

The relationship between air temperature and sovereign bond returns is founded on competing paradigms: macroeconomic, behavioral and energy demand-based. Which of these theoretical mechanisms receives support from data? To answer this, we examined four decades of bond data from 31 countries. Overall, daily temperature positively affects government bond returns. A 10°F rise leads to an increase in sovereign bond returns between 0.22 and 0.85 basis points. We also document evidence of asymmetric and nonlinear price responses to both temperature levels and shocks. Our results survive a battery of robustness checks and lend support to the macroeconomic and behavioral paradigms, albeit not the energy demand-based view.

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e-pub ahead of print date: 23 January 2024

Published date: 23 January 2024

Keywords: air temperature, asset pricing anomalies, behavioral paradigm, energy demand-based view, international government bond markets, macroeconomic channels, risk aversion, seasonal binary variable l affective disorder, sovereign bond returns

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