Mood Beta and Seasonal Patterns in Stock Returns

Summary

This research note presents investor mood as a possible explanation for seasonal patterns in both market returns and the relative performance of stocks. It hypothesizes that assets that perform well in historically upbeat periods will tend to do so again in similar periods, but may lag during downbeat periods. Mood beta measures how an asset’s returns respond to the equal-weighted market during historically high- and low-mood months, using rolling regressions.

The study examines US stocks and established test portfolios over several decades. It reports recurring cross-sectional performance within the same calendar months and weekdays, with weaker reversals across different mood periods. Mood beta predicts returns in the expected direction for high- and low-mood periods, even after controlling for market beta and a sentiment-index beta. Long-short portfolios formed on mood beta also show positive daily alpha in the reported sample. The findings are historical evidence, not a guarantee of future performance; the authors infer mood from seasonal patterns, so the proposed mechanism and its applicability beyond the tested US data remain uncertain.

Key ideas

• Assets’ relative returns can recur in calendar periods associated with similar investor mood.
• Stocks that outperform in past high-mood periods may underperform in low-mood periods.
• Mood beta is estimated from asset sensitivity to the equal-weighted market in high- and low-mood months.
• Mood beta predicts cross-sectional returns beyond market beta and sentiment-index beta in the reported tests.
• The reported long-short results come from historical US stock data and may not generalize.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.