The study examines the economic impact of Seasonal Affective Disorder (SAD), a form of clinical depression often occurring in winter months. It finds a previously-unnoticed seasonal pattern to returns from holding US Treasury bonds. Monthly returns are approximately 80 basis points higher in fall than in winter, providing an extra $30 billion in income in the early fall, based on recent levels of outstanding US Treasury bonds and notes.

“The data are consistent with the psychology literature's finding of a direct link between depression and risk-averse behaviour,” says study co-author Mark Kamstra, a professor in York University’s Schulich School of Business. “The patterns we observe can be explained as a direct function of the clinical onset of and recovery from seasonal affective disorder. We believe that depressed, risk-averse investors move into treasuries and out of equities with the onset of SAD in the early fall, pushing treasury prices up and equity prices down. The pattern reverses in the early spring with the recovery of SAD sufferers.”

Economists have previously documented “time-varying risk aversion” in investors, but haven’t traditionally associated flagging markets with SAD.

The study makes the case that this seasonal downturn isn’t merely related to simple macroeconomic cycles.

“We found that the opposite seasonal patterns in stock and treasury returns were unaffected when we controlled for macroeconomic cycles, including both shocks and predictable movements in the macroeconomy,” Kamstra says. “It is quite possible that SAD is behind the popular Wall Street saying, “sell in May and go away.”

He notes that economists have long based their theories on the belief that investors behave rationally.

“The standard paradigm in finance is that people are rational, with stable, well-defined preferences. The passing of time is predictable and inevitable, so it’s generally believed that the change in seasons is irrelevant to market pricing,” says Kamstra. “This isn’t necessarily the case. All our evidence points to SAD as the only explanation for such a marked seasonality in equity and treasury prices.”

Kamstra notes that approximately 10 percent of the population suffers from SAD, with symptoms beginning as early as August in some people.

“With SAD affecting such a large percentage of the population, its impact on financial markets is certainly a very important area for consideration and worthy of ongoing study."

The study, “Opposing Seasonalities in treasury versus equity returns,” was completed in September 2007 and is currently under review. It is co-authored by Lisa A. Kramer, Rotman School of Management, and Maurice D. Levi, Sauder School of Business, who first documented the economic impact of SAD on equity returns in 2003 in the American Economic Review.

Media contact:

Melissa Hughes, Media Relations, York University: 416 736 2100 x22097 / mehughes@yorku.ca

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