EFFECT OF THE MONSOON FORECAST ANNOUNCEMENT ON STOCK RETURNS

The Indian summer monsoon rainfall (ISMR) has widespread influence on the Indian economic and corporate performance.  Therefore, the announcement of long-range ISMR forecasts by the Indian Meteorological Department can be expected to impact stock returns significantly. We use an event-study approach to study the impact of such announcements during the period from 1999 to 2015. We find that the initial ISMR forecast announcements are associated with statistically significant post-announcement cumulative average abnormal returns (CAARs) for CNX 500 stocks, suggesting that these announcements provide investors with valuable new information. The post-announcement CAARs are positive for forecasts of normal ISMR and negative for forecasts of below normal ISMR. Moreover, “monsoon sensitive” stocks are more responsive to these announcements. We also report statistically significant pre-announcement CAARs which are higher if the announcement forecasts normal rainfall than below-normal rainfall, which suggests that the content of the announcement is at least partially anticipated. However, we also find that, unexpectedly, the CAARs are positive for both types of forecasts. We reason that this may be caused by investor attention getting focused on the impending forecast announcement as its scheduled date approaches. We also provide evidence indicating that investors rationally allocate their attention towards pricing the effect of the ISMR forecast on large stocks rather than on small stocks.