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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
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
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
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