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Winter blues and time variation in the price of risk

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  • Garrett, Ian
  • Kamstra, Mark J.
  • Kramer, Lisa A.

Abstract

Previous research has documented robust links between seasonal variation in length of day, seasonal depression (known as seasonal affective disorder, or SAD), risk aversion, and stock market returns. The influence of SAD on market returns, known as the SAD effect, is large. The authors study the SAD effect in the context of an equilibrium asset pricing model to determine whether the seasonality can be explained using a conditional version of the capital asset pricing model (CAPM) that allows the price of risk to vary over time. Using daily and monthly data for the United States, Sweden, New Zealand, the United Kingdom, Japan, and Australia, the authors find that a conditional CAPM that allows the price of risk to vary in relation to seasonal variation in the length of day fully captures the SAD effect. This result is consistent with the notion that the SAD effect arises because of the heightened risk aversion that comes with seasonal depression.
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Suggested Citation

  • Garrett, Ian & Kamstra, Mark J. & Kramer, Lisa A., 2005. "Winter blues and time variation in the price of risk," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 291-316, March.
    • Handle: RePEc:eee:empfin:v:12:y:2005:i:2:p:291-316
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    References listed on IDEAS

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    1. Lisa A. Kramer & Mark J. Kamstra & Maurice D. Levi, 2000. "Losing Sleep at the Market: The Daylight Saving Anomaly," American Economic Review, American Economic Association, vol. 90(4), pages 1005-1011, September.
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    9. Mark J. Kamstra & Lisa A. Kramer & Maurice D. Levi, 2003. "Winter Blues: A SAD Stock Market Cycle," American Economic Review, American Economic Association, vol. 93(1), pages 324-343, March.
    10. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
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