Effects of Monsoon on Indian Stock Market

This study investigated the effects of monsoon variability on the stock market in India across five sectoral indices including
Agrochemicals, Irrigation, FMCG, Automobiles, and Tourism. By employing a range of econometric models namely OLS regression, CAPM, Seasonal ARIMA, GARCH-family volatility models, rolling regressions, and regime-switching, the study explored
systematic influence of Monsoon Rainfall on sectoral returns. Results from the study indicate inconsistent and limited direct effects of monsoon on the stock market: regression models demonstrated insignificant explanatory power, volatility models showed
clustering without any persistence driven by monsoon, and excess return analysis showed negligible seasonal dependence. The
regime-switching models, however, identified state-dependent and conditional effects, particularly in industries such as Tourism
and Irrigation which are sensitive to the monsoon period. Based on these results, four trading strategies including Seasonal LongOnly, Regime-Vol Tactical Allocation, Monsoon Alpha Capture, and Multi-Signal Tiered Alpha were developed, backtested, and
paper-traded. The first strategy which was the Seasonal Long-Only strategy underperformed as compared to the buy-and-hold
benchmark, confirming that the seasonal timing strategy alone was not sufficient. All the other three strategies consistently performed better than the seasonal long-only and buy-and-hold benchmarks, proving that adaptive, regime-based techniques could
convert weak academic signals into investment performance practically. This study contributes to existing literature by explaining
the nonlinear and state-dependent effect of monsoons in the financial market and presents applicable frameworks for investors in
economies that consider climate variability a critical factor in macroeconomics.