Winter Blues and Time Variation in the Price of Risk

33 Pages Posted: 18 Jul 2003  

Mark J. Kamstra

York University - Schulich School of Business; Rady School of Management

Lisa A. Kramer

University of Toronto - Rotman School of Management

Ian Garrett

Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 2003

Abstract

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. We 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 CAPM that allows the price of risk to vary over time. Using daily and monthly data for the US, Sweden, New Zealand, the UK, Japan, and Australia, we 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 is consistent with the notion that the SAD effect arises due to the heightened risk aversion that comes with seasonal depression, reflected by a changing risk premium.

Keywords: stock market seasonality, Conditional CAPM, time-varying risk aversion, behavioral finance, Seasonal Affective Disorder

JEL Classification: G10, G12

Suggested Citation

Kamstra, Mark J. and Kramer, Lisa A. and Garrett, Ian, Winter Blues and Time Variation in the Price of Risk (December 2003). EFA 2003 Annual Conference Paper No. 263. Available at SSRN: https://ssrn.com/abstract=423963 or http://dx.doi.org/10.2139/ssrn.423963

Mark J. Kamstra

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Lisa A. Kramer (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-978-2496 (Phone)
416-971-3048 (Fax)

HOME PAGE: http://www.chass.utoronto.ca/~lkramer

Ian Garrett

Manchester Business School ( email )

Manchester
United Kingdom

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