Seasonal affective disorder and currency markets

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.