Winter blues and time variation in the price of risk

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.