Behavioural finance argues that some market anomalies can be explained by assuming investors are not always fully rational. This thesis contributes a greater understanding of the relationship between investor mood and financial markets, through exploring the effect of seasonal affective disorder (SAD) on UK financial markets .
Chapter 2, the first empirical chapter, investigates the SAD effect on UK stock portfolio returns, by employing daily returns of all stocks traded on the London Stock Exchange (LSE) from 1988 to 2011. The chapter constructs SAD variables and six stock portfolios to examine the SAD effect in different stock portfolios, with some well-known market anomalies and weather factors are considered. The estimation result supports the existence of the SAD effect in UK stock portfolio returns, and the SAD effect is more pronounced in small size stock portfolios.
Chapter 3, explores the SAD effect on UK stock trading activities, by applying a variety of econometric techniques to ascertain whether SAD affects stock portfolio turnover. The analysis indicates the more people suffer from SAD, the less stock turnover, and the SAD effect is more influential on small size stock turnover.
Chapter 4 turns to bond markets, aiming to ascertain the SAD effect on UK government bond returns. We study the relationship between SAD indicators and eight government bond returns, and a positive correlation between SAD indicators and government bond returns are uncovered. The result suggests that investors prefer investing in government bonds when suffering from SAD.
Overall, this thesis demonstrates a clear and significant relationship between investor mood and UK financial markets, through exploring the SAD effect on stock and government bond markets. This thesis concludes that the onset of SAD leads to lower stock returns and turnover, and higher government bond returns; and that recovery from SAD leads to higher stock returns and turnover, and lower government bond returns.
