WINTER BLUES & SAD EFFECT

Group 1: Ray BawaniaDamian SydorWendell XuYani WuRajarshi MaitiStewart WattLeonardo Silva

Authors: M. KamstraL. KramerM. Levi (2003)

A SAD Stock Market CycleDepression has been linked with Seasonal Affective Disorder (SAD), which is a condition that affects people mood during the seasons of relatively fewer hours of daylight and symptoms include difficulty concentrating, loss of interest in sex, social withdrawal, loss of energy, sleep disturbance, and carbohydrate or sugar craving often accompanied by weight gain.Length of the days Seasonal Affective Disorder

(SAD)Linked with

Seasonal Affective Disorder (SAD)

DepressionLinked with

Depression Heightened Risk Aversion

Linked with

Heightened Risk Aversion Stock ReturnsLinked with

Length of the days

Stock ReturnsLinked with

Therefore….

From several factors that could be correlated with seasonal market returns:

Minutes of sunshine

Length of day

Temperature

Cloud cover

Precipitation

Global radiation

Barometric pressure

Strongest Correlation

More pronounced SAD effects in higher-latitude markets where winter and fall days are relatively shorter affecting people’s mood and market returns

Lower returns should commence with autumn, as SAD-influenced individuals begin shinning risk and rebalancing their portfolios in favor of relatively safe assets following by abnormally high returns when days begin to lengthen and SAD-effected individuals begin resuming their risky holdings

Around the World

Market Return Data

Measuring Effects of SADKey Independent Variable: Hours of Night

Difference between Northern and Southern Hemispheres

Influences: Regression Used to Estimate Effect

Rt = μ [constant]+ ρ1rt-1 + ρ2rt-2 [limit for autocorrelation]+ μ MondayDt Monday [trading day following the weekend]+ μ TaxDt

Tax [last trading day & first 5 days of new year]+ μ FallDt

Fall [trading days in fall]+ μ cloudCloudt [percentage of cloud cover]+ μ precipitationPrecipitationt [millimeters in rain]+ μ g [temperature in Celsius]+ μ SADSADt [focus of study]+ εt

Results:Part I

Results: Part II

Trading Strategy

Switch assets between northern and southern hemisphere

Example: Sweden in Sweden’s Winter and Australia in Australia’s winter. Result:

21.1% gain per year, 7.9% more than holding just one country for full year

Robustness Checks Maximum-likelihood Model

Jointly models the mean and variance of returns which shows the similar results with only some minor quantitative changes

Other Measures for SAD # of hours of night normalized 0 ~ 1 # of hours of night normalized -1 ~ +1, Nonzero values through all four seasons. Roughly same results across all measures.

SAD and Asymmetry Around Winter Solstice Separate regressors for SAD measure Same asymmetric SAD effects Different breakpoint or no breakpoint (Fall/Winter) Winter Solstice: best to capture the asymmetry of the SAD effect.

Redefining the Tax-Loss Variable Setting tax-loss dummy to equal 1 for all the trading days in the first month of the

tax year Stronger SAD effect & Weaker tax-loss.

Market Segmentation and SAD Effects

Market Segmentation and SAD Effects

Markets are not fully integrated due to home bias

Large discrepancy in market size between Northern and Southern Hemisphere

American Depositary Receipts (ADRs) and other financial tools to dampen SAD effects

Conclusion

SAD effect has impacted stock markets globally Its effect is more pronounced than well-known

market seasonal and environmental factors in every Northern country

Day light has had a profound effect on the moods of humans; a relationship has been found with the level of risk aversion

The SAD effect is another behavioral factor that should not be ignored while explaining market returns