The effects of sunshine-induced mood on bank lending decisions and default risk: an option-pricing model

Authors:
Jyh-Jiuan Lin;Jyh-Horng Lin;Rosemary Jou
Affiliations:
Department of Statistics, Tamkang University, Tamsui, Taipei County, Taiwan, ROC;Graduate Institute of International Business, Tamkang University, Tamsui, Taipei County, Taiwan, ROC;Graduate Institute of Management Sciences, Tamkang University, Tamsui, Taipei County, Taiwan, ROC
Venue:
WSEAS Transactions on Information Science and Applications
Year:
2009

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Abstract

Even though psychological evidence and casual intuition predict that weather may lead to changes in equity returns, little attention has been paid to these changes through asset pricing mechanisms. This paper fills this gap by examining the effects of sunny weather enhanced upbeat mood on bank spread management and default risk. An option-based model of bank spread behavior is developed to study these closely related phenomena. The model is designed to indicate the fat tails of loan repayments caused by mood effects induced by good weather. With the good mood influences on bank lending, this paper shows that sunshine is negatively correlated with the default risk in equity returns.