Weather & SAD Related Mood Effects on the Financial Market ∗

We investigate the relationship between weather/seasonal affective disorder (SAD) and the financial market. We use a wide variety of financial market data, namely risk-free interest rates, US corporate bond indexes, the spreads of individual US corporate bonds, stock index returns, stock returns and the VIX volatility index, as well as several weather variables and a SAD proxy. We distinguish between a model with a direct effect of the weather and SAD on the financial market and one with an indirect effect via a latent variable mood. Whereas only the latter model is justified by psychological literature, often the former model is used as an approximation. One major innovation of this paper is a consistent econometric implementation of the indirect effect assumption. We show that this demands for an analysis of various financial sub-markets instead of focusing on single market segments. We demonstrate that the approximation by direct effects yields biased estimates. Our study supports weather-related, but no SAD related, mood effects on the financial market