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Sentiment and stock returns: The SAD anomaly revisited

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  • Kelly, Patrick J.
  • Meschke, Felix

Abstract

Widely-cited research by Kamstra et al. (2003) argues that changes in mood resulting from Seasonal Affective Disorder (SAD) drive changes in investor risk aversion and cause seasonal patterns in aggregate stock returns around the world. In this paper we reexamine the so-called SAD effect by replicating and extending Kamstra et al. (2003). We study the psychological underpinnings of the SAD hypothesis and show that the time-series predictions of the SAD model do not correspond to the seasonal patterns in depression found in the general population. We also investigate the cross-sectional prediction that SAD has a greater effect on stock markets in countries where SAD is more prevalent and find no relation between the prevalence of SAD and stock returns. Finally, we document that the SAD effect is mechanically driven by an overlapping dummy-variable specification and higher returns around the turn of the year.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 6 (June)
Pages: 1308-1326

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1308-1326

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Asset pricing Market efficiency Behavioral finance Seasonality Predictability Investor behavior Seasonal Affective Disorder;

References

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Citations

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Cited by:
  1. Kamstra, Mark J. & Kramer, Lisa A. & Levi, Maurice D., 2012. "A careful re-examination of seasonality in international stock markets: Comment on sentiment and stock returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(4), pages 934-956.
  2. Andrade, Sandro C. & Barrett, W. Brian, 2011. "Can broker-dealer client surveys provide signals for debt investing?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(5), pages 1170-1178, May.
  3. Levy, Tamir & Yagil, Joseph, 2012. "The week-of-the-year effect: Evidence from around the globe," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(7), pages 1963-1974.
  4. Mamatzakis, E, 2013. "Does weather affect US bank loan efficiency?," MPRA Paper 51616, University Library of Munich, Germany.
  5. Tefft, Nathan, 2012. "Mental health and employment: The SAD story," Economics & Human Biology, Elsevier, Elsevier, vol. 10(3), pages 242-255.
  6. Khaled, Mohammed S. & Keef, Stephen P., 2013. "Seasonal affective disorder: onset and recovery," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 42(C), pages 136-139.
  7. Kaustia, Markku & Rantapuska, Elias, 2013. "Does mood affect trading behavior?," SAFE Working Paper Series 4, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  8. Lect. Aurora Murgea Ph. D, 2010. "Classical Lassical And Behavioural Finance In Investor Decision," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, University of Craiova, Faculty of Economics and Business Administration, vol. 2(38), pages 12, May.
  9. Ethan Watson & Mary C. Funck, 2012. "A cloudy day in the market: short selling behavioural bias or trading strategy," International Journal of Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 8(3), pages 238-255.
  10. Vidal-García, Javier & Vidal, Marta, 2014. "Seasonality and idiosyncratic risk in mutual fund performance," European Journal of Operational Research, Elsevier, Elsevier, vol. 233(3), pages 613-624.

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