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Seasonal affective disorder and currency markets

Author

Listed:
  • John Arabadjis
  • Michael Melvin

    (University of California San Diego)

  • Robert Savage
  • John Velis

Abstract

Harry Markowitz is known as the grandfather of behavioral finance based on his 1952 work on utility theory. We study a behavioral issue applied to the currency market: seasonal affective disorder (SAD). As the days grow shorter (longer) in fall (spring), investors become more (less) risk averse due to changes in depression related to SAD. Our empirical results are consistent with changes in risk-taking in global equities and the associated change in currency hedging portfolios. In the spring/summer season of long daylight hours, we find evidence of greater short positions for the euro. This is consistent with investors taking more risk in global equities and adding to their currency shorts to hedge the FX exposure. Such changes in euro holdings are reversed in the season of shorter daylight hours, consistent with risky investments being reduced due to greater risk aversion so currency hedges are reduced. For currency returns, we find that the greater shorting in spring–summer is associated with currency depreciation over the season of long days. In the season of short days, currency buying associated with cutting hedging positions leads to currency appreciation. We find that the SAD influence on seasonal currency returns is much like the evidence for equity returns. Finally, we construct and backtest a SAD-inspired currency portfolio. We find that trading the spring/summer risk-on SAD effect from longer days and recovery from SAD-related depression had a decent positive risk-adjusted performance and displayed fairly consistent performance over time.

Suggested Citation

  • John Arabadjis & Michael Melvin & Robert Savage & John Velis, 2025. "Seasonal affective disorder and currency markets," Annals of Operations Research, Springer, vol. 346(1), pages 549-565, March.
    • Handle: RePEc:spr:annopr:v:346:y:2025:i:1:d:10.1007_s10479-024-06364-z
    DOI: 10.1007/s10479-024-06364-z
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    References listed on IDEAS

    as
    1. Guerard, John, 2023. "Harry Markowitz: An appreciation," International Journal of Forecasting, Elsevier, vol. 39(4), pages 1496-1501.
    2. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60(2), pages 151-151.
    3. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Behavioral finance; Harry Markowitz; Seasonal affective disorder; Currency positioning;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G4 - Financial Economics - - Behavioral Finance

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