A seasonal regularity in the impact of investor sentiment on asset prices
We explore whether sentiment-induced mispricing and the subsequent speed of correction is affected by investor mood, as measured by the seasonal onset of depression (or winter blues). Using a measure of negative sentiment based on households’ internet searches, we first find that investors do not make sentiment-induced-mispricing errors near the spring equinox, during which people are recovering from seasonal depression symptoms. Second, we find the correction speed of mispricing in equity returns in the two days after the negative sentiment shock in the fall is not different from the correction speed in the summer. Lastly, we tease out known risk factors from the FEARS index and find that the orthogonalized FEARS index no longer explains contemporaneous returns, but continues to predict positive returns in the next two days. Moreover, we identify an insignificant seasonality pattern in the predictability of the orthogonalized FEARS index.