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Winter blues and time variation in the price of risk

  • Ian Garrett
  • Mark Kamstra
  • Lisa Kramer

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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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper No. with number 2004-8.

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Date of creation: 2004
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Handle: RePEc:fip:fedawp:2004-8
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  1. 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.
  2. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
  3. Mark Kamstra & Lisa Kramer & Maurice Levi, 2002. "Winter blues: a SAD stock market cycle," Working Paper 2002-13, Federal Reserve Bank of Atlanta.
  4. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  5. Ritter, Jay R, 1988. " The Buying and Selling Behavior of Individual Investors at the Turn of the Year," Journal of Finance, American Finance Association, vol. 43(3), pages 701-17, July.
  6. David Hirshleifer & TYLER G. SHUMWAY, 2004. "Good Day Sunshine: Stock Returns and the Weather," Finance 0412004, EconWPA.
  7. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
  8. Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-45, December.
  9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  10. 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.
  11. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
  12. Tokunaga, Howard, 1993. "The use and abuse of consumer credit: Application of psychological theory and research," Journal of Economic Psychology, Elsevier, vol. 14(2), pages 285-316, June.
  13. Malliaropulos, Dimitrios & Priestley, Richard, 1999. "Mean reversion in Southeast Asian stock markets," Journal of Empirical Finance, Elsevier, vol. 6(4), pages 355-384, October.
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