Winter Blues and Time Variation in the Price of Risk

Ian Garrett, Mark Kamstra, and Lisa Kramer
Working Paper 2004-8
April 2004

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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.

JEL classification: G10, G12

Key words: stock market seasonality, conditional CAPM, time-varying risk aversion, behavioral finance, seasonal affective disorder

Forthcoming in the Journal of Empirical Finance, 2004. The authors have benefited from the comments and suggestions of Franz Palm, Kris Jacobs, Maurice Levi, Cesare Robotti, participants at the European Finance Association 2003 meeting, the Northern Finance Association 2003 meeting, and seminar participants at the Federal Reserve Bank of Atlanta, the University of Manchester, and the University of Munster. A previous version of this paper was circulated with the title “A SAD Day for Behavioral Finance? Winter Blues and Time Variation in the Price of Risk.” Kramer thanks the Social Sciences and Humanities Research Council of Canada for financial support. Part of this research was done while Garrett was visiting the Federal Reserve Bank of Atlanta. He would like to thank the Bank for its hospitality. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Ian Garrett, Manchester School of Accounting and Finance, University of Manchester, Oxford Road, Manchester, U.K., M13 9PL, 44-0-161-275-4958, 44-0-161-275-4023 (fax),; Mark Kamstra, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309, 404-498-7094, 404-498-8810 (fax),; or Lisa Kramer, Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, Ontario, M5S 3E6, Canada, 416-921-4285, 416-971-3048 (fax),