Investor mood and financial markets
Numerous studies in recent decades have linked investor mood and financial market behavior, but most works have been empirical investigations. This paper bridges the gap between empirical findings and financial theory. By slightly modifying the Lucas (Lucas, R.E., 1978. Asset prices in an exchange economy. Econometrica 46, 1429-1445.) model, this study shows how investor mood variations affect equilibrium asset prices and expected returns. Analysis results indicate that both equity and bill prices correlate positively with investor mood, with higher asset prices associated with better mood. Conversely, expected asset returns correlate negatively with investor mood. Further, the mood effect on asset prices increases when investors are in a good mood, and mood variations exhibit a greater influence on equity markets than on bill markets. Results of this study suggest that investor mood is a vital factor in equilibrium asset prices and returns, and integrating investor mood into asset-pricing models helps to interpret the growing body of seemingly anomalous evidence regarding investor behavior.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kaufman, Bruce E., 1999. "Emotional arousal as a source of bounded rationality," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 135-144, February.
- Ariel, Robert A, 1990. " High Stock Returns before Holidays: Existence and Evidence on Possible Causes," Journal of Finance, American Finance Association, vol. 45(5), pages 1611-26, December.
- George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2001.
"Projection Bias in Predicting Future Utility,"
General Economics and Teaching
- George Loewenstein, Ted O'Donoghue and Matthew Rabin., 2000. "Projection Bias in Predicting Future Utility," Economics Working Papers E00-284, University of California at Berkeley.
- Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2000. "Projection Bias in Predicting Future Utility," Department of Economics, Working Paper Series qt5qh6142m, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2002. "Projection Bias in Predicting Future Utility," Working Papers 02-11, Cornell University, Center for Analytic Economics.
- Antonio Falato, 2008.
"Happiness maintenance and asset prices,"
Finance and Economics Discussion Series
2008-19, Board of Governors of the Federal Reserve System (U.S.).
- Stephen Keef & Melvin Roush, 2007. "Daily weather effects on the returns of Australian stock indices," Applied Financial Economics, Taylor & Francis Journals, vol. 17(3), pages 173-184.
- Hanoch, Yaniv, 2002. ""Neither an angel nor an ant": Emotion as an aid to bounded rationality," Journal of Economic Psychology, Elsevier, vol. 23(1), pages 1-25, February.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Kamstra, M.J. & Kramer, L.A. & Levi, M.D., 1998.
"Losing Sleep at the Market: The Daylight-Savings Anomaly,"
dp98-04, Department of Economics, Simon Fraser University.
- 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.
- Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
- David Hirshleifer & Tyler Shumway, 2003.
"Good Day Sunshine: Stock Returns and the Weather,"
Journal of Finance,
American Finance Association, vol. 58(3), pages 1009-1032, 06.
- Yuan, Kathy & Zheng, Lu & Zhu, Qiaoqiao, 2006. "Are investors moonstruck? Lunar phases and stock returns," Journal of Empirical Finance, Elsevier, vol. 13(1), pages 1-23, January.
- Hirshleifer, David, 2001.
"Investor Psychology and Asset Pricing,"
5300, University Library of Munich, Germany.
- Anya Krivelyova & Cesare Robotti, 2003. "Playing the field: Geomagnetic storms and international stock markets," FRB Atlanta Working Paper 2003-5, Federal Reserve Bank of Atlanta.
- 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.
- Hui-Chu Shu & Mao-Wei Hung, 2009. "Effect of wind on stock market returns: evidence from European markets," Applied Financial Economics, Taylor & Francis Journals, vol. 19(11), pages 893-904.
- Estrada, Carlos A. & Isen, Alice M. & Young, Mark J., 1997. "Positive Affect Facilitates Integration of Information and Decreases Anchoring in Reasoning among Physicians," Organizational Behavior and Human Decision Processes, Elsevier, vol. 72(1), pages 117-135, October.
- Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-45, December.
- Charles Lee & Andrei Shleifer & Richard Thaler, 1990.
"Investor Sentiment and the Closed-End Fund Puzzle,"
NBER Working Papers
3465, National Bureau of Economic Research, Inc.
- Gary S. Becker & Casey B. Mulligan, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 729-758.
- Etzioni, Amitai, 1988. "Normative-affective factors: Toward a new decision-making model," Journal of Economic Psychology, Elsevier, vol. 9(2), pages 125-150, June.
- Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
- George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
- Au, Kevin & Chan, Forrest & Wang, Denis & Vertinsky, Ilan, 2003. "Mood in foreign exchange trading: Cognitive processes and performance," Organizational Behavior and Human Decision Processes, Elsevier, vol. 91(2), pages 322-338, July.
- Chang, Tsangyao & Nieh, Chien-Chung & Yang, Ming Jing & Yang, Tse-Yu, 2006. "Are stock market returns related to the weather effects? Empirical evidence from Taiwan," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 364(C), pages 343-354.
- Dowling, Michael & Lucey, Brian M., 2005. "Weather, biorhythms, beliefs and stock returns--Some preliminary Irish evidence," International Review of Financial Analysis, Elsevier, vol. 14(3), pages 337-355.
- Cao, Melanie & Wei, Jason, 2005. "Stock market returns: A note on temperature anomaly," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1559-1573, June.
- George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
- Isen, Alice M. & Geva, Nehemia, 1987. "The influence of positive affect on acceptable level of risk: The person with a large canoe has a large worry," Organizational Behavior and Human Decision Processes, Elsevier, vol. 39(2), pages 145-154, April.
- Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
- Nygren, Thomas E. & Isen, Alice M. & Taylor, Pamela J. & Dulin, Jessica, 1996. "The Influence of Positive Affect on the Decision Rule in Risk Situations: Focus on Outcome (and Especially Avoidance of Loss) Rather Than Probability," Organizational Behavior and Human Decision Processes, Elsevier, vol. 66(1), pages 59-72, April.
- Wright, William F. & Bower, Gordon H., 1992. "Mood effects on subjective probability assessment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 52(2), pages 276-291, July.
- Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
- John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:76:y:2010:i:2:p:267-282. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.