EconSouth (Fourth Quarter 2002)

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta. For complete text of summarized articles and publications, see the Atlanta Fed’s World Wide Web site at

How the seasons affect the stock market
Seasonal affective disorder (SAD) is an extensively documented medical condition in which the shortness of the days in fall and winter leads to depression for many people. Experimental research in psychology and economics indicates that depression, in turn, causes heightened risk aversion. Building on these links between the length of day, depression and risk aversion, authors Mark Kamstra, Lisa Kramer and Maurice Levi provide international evidence that stock market returns vary seasonally with the length of day, a result they call the SAD effect.

This working paper, due to be published in the American Economic Review in spring 2003, uses data from numerous stock exchanges and controls for well-known market seasonal effects, as well as other environmental factors like temperature, cloud cover and rain. The authors find that stock returns are strongly related to the amount of daylight through the fall and winter. Patterns at different latitudes and in both hemispheres provide compelling evidence of a link between seasonal depression and seasonal variations in stock returns: Higher-latitude markets show more pronounced SAD effects, and results in the Southern Hemisphere are, like the seasons, six months out of phase. The authors conclude that, overall, the economic impact of the SAD effect is significant.

Working Paper 2002-13
July 2002

Do high-tech stocks perform like lottery tickets?
Today, after the dramatic falloff in stock prices in 2001, many technology stocks seem to be highly priced relative to the firms’ likely prospects. This concern can always be raised about any firm — even “old-economy” businesses like automobile manufacturers — but the enthusiasm for high-tech stocks seems especially disproportional and hard to fathom. There are many explanations for the prices of Internet stocks, including craziness or euphoria on the part of investors.

One theory that has occurred to various observers is that technology stocks are like lottery tickets. People buy a stock like with a few thousand dollars and hope that they will strike it rich. If Amazon goes bust, the investor sustains a small loss. If Amazon is the next Wal-Mart, it’s time to celebrate. People buy lottery tickets for the same reasons: Most buyers lose; a few win big. Many people are willing to have an expected loss when there is the possibility of getting rich.

According to a recent working paper, the experiences of investors in prior new industries can be informative about what investors might reasonably expect. Do some people get rich? Or do investors on average lose?

Authors Gerald Dwyer and Cora Barnhart examine the expected returns from investing in new industries. They look at U.S. data on sellers of stock in a variety of businesses, including personal computers, airlines and airplane manufacturers, automobile manufacturers, railroads and telegraphs. The evidence unambiguously indicates that investors in new industries have received positive expected returns — far from zero. In general, those expected returns have been very high relative to comparable returns on diversified stock portfolios. The authors also interpret the evidence as indicating that some investors do extremely well.

Working Paper 2002-15
August 2002

Dollar Index Chart

The dollar declined in July 2002 against the 15 major currencies tracked by the Atlanta Fed, its fifth consecutive monthly decline. Decreases were registered on all subindexes except the Americas index, which rose slightly. In August and September, however, the dollar rose. Increases were registered on all subindexes in August and on all subindexes except the European subindex in September.

Note: For more detailed, monthly updates and historical data on the dollar index, see the Atlanta Fed’s World Wide Web site at

Economic Review includes Financial Markets Conference papers
The fourth quarter 2002 issue of the Atlanta Fed’s Economic Review includes three papers presented at the bank’s 2002 Financial Markets Conference, “Venture Capital and Technology: What’s Next?” co-sponsored with New York University’s Stern School of Business.

The conference speakers tackled issues ranging from the problem of “dirty data” to the replication of the U.S. venture capital model abroad. The paper by Paul Gompers, a Harvard Business School professor, finds that corporate venturers actually enjoy a higher success rate than independent venture capitalists do. His paper stresses the need for corporate investors to maintain a highly focused strategy to leverage the company’s brand as a value-added asset and to work in concert with various corporate divisions.

In the second conference paper, Thomas Hellmann and Manju Puri, professors at Stanford University Graduate School of Business, maintain that in spite of the dramatic collapse in venture capital financing during the past two years, the developments of 2001 are “a mere kink in an otherwise exceptional growth curve of the venture capital industry.” The authors examine the difference between short- and long-term performance to ascertain what changes have taken place within the venture capital industry.

Finally, Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, examines the effects of the decline in venture capital investments. Stressing the cyclical nature of the venture capital industry, Lerner suggests that innovation can be equally affected by policy issues.

To see all the fourth quarter 2002 Economic Review articles in their entirety, visit the bank’s Web site at and go to Publications.

Economic Review
Fourth Quarter 2002

Readers report overall satisfaction with EconSouth
Many of EconSouth’s readers had an opportunity recently to provide feedback on the magazine and how and why they read it. The second quarter 2002 issue included a readership survey in half the copies, randomly selected, mailed to subscribers. The results of this survey show that most subscribers are happy with EconSouth’s scope and content.

Respondents provided insight into which EconSouth articles and features they read most. Of readers responding to the survey, 72 percent described the cover story, regional focus articles and the state of the states feature as valuable or highly valuable. Other features in the magazine also fared well. A significant number of respondents find the research notes and news feature valuable or highly valuable, and 86 percent find that the magazine is usually or sometimes a source of international economic news.

Answers to other survey questions reveal how readers spend their time with EconSouth. About 86 percent of respondents find the articles to be an appropriate length, and 80 percent spend 10 minutes to an hour with each issue.

Most readers (90 percent) answering the survey fall into five broad categories of professional occupations: general business (23 percent) and banking and financial (18 percent) as well as academic, business economics, and government and policy (16 percent each).

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