Seasonality in Equilibrium Stock Returns : A Dynamic Perspective on Sad

Recent research has investigated the role of depression induced by seasonal affective disorder, SAD, for stock market returns. This paper extends this enquiry by developing the implications of SAD in a continuous-time equilibrium-return framework with time-varying risk aversion. This approach identifies three ways by which SAD can affect returns. Quarterly and daily returns data on CRSP overall market returns, and on different size and risk portfolios, strongly support the implications of SAD in this dynamic equilibrium setting. For example, stock market returns decrease monotonically from quarter 1 to quarter 4, with the decrease larger for smaller/riskier firms