Winter Blues: A SAD Stock Market Cycle

Abstract

Depression has been linked with seasonal affective disorder (SAD), a condition that affects many people during the seasons of relatively fewer hours of daylight. Experimental research in psychology has documented a clear link between depression and lowered risktaking behavior in a wide range of settings, including those of a nancial nature. Through the links between SAD and depression and between depression and risk aversion, seasonal variation in length of day can translate into seasonal variation in equity returns. Based on supportive evidence from psychology which suggests SAD is linked closely with hours of daylight, we consider stock market index data from countries at various latitudes and on both sides of the equator. We model differences in the seasonal variation of daylight across countries to capture the in uence of daylight on human sentiment, risk tolerance, and hence stock returns. Our results strongly support a SAD effect in the seasonal cycle of stock returns that is both signi cant and substantial, even after controlling for well-known market seasonals and other environmental factors. Patterns at different latitudes and in both hemispheres provide compelling evidence of a link between seasonal depression and seasonal variation in stock returns: higher-latitude markets show more pronounced SAD effects and results in the Southern Hemisphere are six months out of phase, as are the seasons.The remainder of the paper is organized as follows. In Section I, we discuss SAD, depression, and equilibrium market returns. In Section II, we introduce the international data sets. In Section III, we explain the construction of the variables intended to capture the in uence of SAD on the stock market. We document in Section IV the signi cance of the SAD effect, both statistical and economic, and provide an example of the excess returns that arise from trading strategies based on the SAD effect. In Section V, we explore the robustness of the SAD effect to changes in variable de nitions and estimation methods. Section VI considers SAD in the context of segmented versus integrated capital markets. Section VII concludes.

The Behavior of Stock Prices during Lent and Advent

“…Some circumstances specific to the end of the year could also affect the stock markets behavior [23,29]. Kamstra et al [45] identified a significant impact of the SAD cycle on the stock markets. The weather conditions during Lent and Advent (Hungary belongs to the Northern Hemisphere, while the other four countries belong to the Southern one) could also affect stock markets behavior [31,41,67].…”

Rogue State Behavior and Markets: the Financial Fallout of North Korean Nuclear Tests

“…Thus, in order to test the significance of the reversal effect, we examine the first three trading days after each nuclear test or the announcement in the case of the first. To test the null hypothesis and to estimate the impact that the two events had on stock returns, we adopt a similar methodology used in previous event studies (inter allia: Kaplanski and Levi, 2010;Kamstra, et al 2003;Warner, 1980, 1985). Assuming that investors do not hedge against exchange rate risk, the conditional version of the world CAPM augmented for several known anomalies in financial markets implies the following behaviour for returns: (1) where R t is the daily rate of return on the relevant stock price index, γ 0 is the regression intercept.…”

Effects of Intraday Weather Changes on Asset Returns and Volatilities

“…Their result suggests that trading strategies allowing for weather effects on returns would moderately improve the Sharpe ratio of the market portfolio, given relatively low transaction costs. Kamstra et al (2003) analyze the seasonal cycle of stock returns according to the seasonal variation in daylight time and find a strong correlation between fewer hours of daylight and lower stock returns. Their results are substantial and significant for stock market index data from nine countries that are geographically dispersed and at various latitudes in both hemispheres.…”

“…Saunders (1993) analyzes the correlation between the weather conditions of New York City and daily return changes in the NYSE/AMEX index, and finds that weather conditions have a significant impact on the changes in stock prices when used as proxies for investor sentiments. Following the seminal work of Saunders (1993), many studies, including those by Cao and Wei (2005), Hirshleifer and Shumway (2003), and Kamstra et al (2003), support Saunders's (1993) view, while others find little evidence of the weather effect on stock returns suggested by Saunders (Krämer and Runde, 1997;Trombley, 1997). More recently, researchers have been investigating Second, we document the volatility behavior as well as the stock returns in response to the weather effect.…”