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Out of the blue: mood maintenance hypothesis and seasonal effects on investors' reaction to news

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  • Doron Kliger
  • Andrey Kudryavtsev

Abstract

Contemporary research documents various psychological aspects of economic decision-making. The main goal of our study is to analyse the role of the Mood Maintenance Hypothesis (MMH) in financial markets. MMH refers to people's tendency to maintain positive mood states, and implies that positive mood is associated with less critical thinking and reduced information processing, yielding three behavioral effects: (i) out of the blue , resulting in stronger negative reactions to bad news during good mood periods, (ii) sunray on a cloudy day , leading to stronger positive reactions to good news during bad mood periods, and (iii) shallow thinking , producing stronger reactions to all kinds of news during good mood periods. Employing daylight duration changes and a measure of onset and recovery from symptoms of Seasonal Affective Disorder (SAD) as proxies for contemporaneous investors' mood, we test the role of mood in investors' reactions to analyst recommendation revisions. We find corroborative results, most notably that negative stock price reactions to recommendation downgrades are significantly stronger during daylight increasing periods, and, alternatively, during the periods characterized by low rates of onset and high rates of recovery from SAD. The magnitude of the effect increases in longer event windows.

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  • Doron Kliger & Andrey Kudryavtsev, 2014. "Out of the blue: mood maintenance hypothesis and seasonal effects on investors' reaction to news," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 629-640, April.
    • Handle: RePEc:taf:quantf:v:14:y:2014:i:4:p:629-640
    DOI: 10.1080/14697688.2012.745646
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    Cited by:

    1. Kucheev, Yury O. & Sorensson, Tomas, 2019. "The seasonality in sell-side analysts’ recommendations," Finance Research Letters, Elsevier, vol. 29(C), pages 162-168.
    2. repec:rfb:journl:v:09:y:2017:i:2:p:007-026 is not listed on IDEAS
    3. Gelman, Sergey & Kliger, Doron, 2016. "Time-Induced Stress Effect on Financial Decision Making in Real Markets: The Case of Traffic Congestion," VfS Annual Conference 2016 (Augsburg): Demographic Change 145915, Verein für Socialpolitik / German Economic Association.
    4. Qadan, Mahmoud & Kliger, Doron, 2016. "The short trading day anomaly," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 62-80.
    5. Kliger, Doron & Raviv, Yaron & Rosett, Joshua & Bayer, Thomas & Page, John, 2015. "Seasonal affective disorder and seasoned art auction prices: New evidence from old masters," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 59(C), pages 74-84.
    6. Andrey Kudryavtsev, 2017. ""I'll Think about it Tomorrow": Price Drifts Following Large Pre-Holiday Stock Price Moves," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 9(2), pages 043-062, December.

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