Do Negative Moods Drive Anchoring in Stock Markets: A SAD Approach

Casper Kristiansen

Student thesis: Master thesis


The purpose of this thesis is to investigate whether depressed moods increase anchoring effects in stock markets. Anchoring constitutes a powerful heuristic that has garnered extensive attention within psychology and behavioral finance. In stock trading, the widely reported 52-week high price has been demonstrated as a salient financial anchor. When the price is near the 52-week high, traders are reluctant to bid up the price even if information warrants it. Eventually, the information prevails, and the price shifts to its intrinsic value. To measure the associated returns, research employs a momentum trading strategy formulated by George and Hwang (2004) in which portfolios are formed based on stocks’ proximity ratio to the anchor and held for six months to allow suppressed information to be expressed. On the psychology side, experimental research shows that individuals in negative moods tend to exhibit increased anchoring. If true, depressed investors ought to be even more unwilling to bid prices beyond the anchor, resulting in greater 52-week high anchoring profits. To connect these two phenomena, the paper uses seasonal affective disorder (SAD) linked to latitudes of five stock exchanges to categorize periods of heightened depressed moods among traders. SAD constitutes a type of major depression that is regulated by exposure to sunlight. Previous literature has linked increased risk aversion due to SAD with general stock market returns, IPO underpricing, and stock analyst estimates. The analysis explicitly addresses whether months affected by SAD correlate with significant differences in a 52-week high anchoring strategy. Substantial anchoring is observed at the Helsinki, New Zealand, and Stockholm exchanges (3/5), but none are statistically significant with SAD and seem disassociated from a seasonal pattern based on daylight. The underlying reasons are debatable, and prominent explanations concern an inconclusive link between SAD and latitude, unaffected marginal traders, and a trading strategy that may be capturing more than anchoring, which ultimately suggests that the analysis results may be somewhat disconnected from its fundamental underpinnings regarding negative moods and anchoring.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2021
Number of pages77
SupervisorsKathrin Schlafmann