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Mood and Judgment of Subjective Probabilities: Evidence from the U.S. Index Option Market

Review of Finance 2003 7(2), 235-248
Numerous psychological studies show that weather conditions affect people's mood and that mood states are correlated with people's subjective evaluation of future probabilities. In this paper, a new approach is developed and asset market data are employed to test the mood-subjective probability relation. Cloud cover and precipitation volume serve as two mood proxies. Our statistical analysis suggests that bad mood states are characterized by investors placing higher probabilities on adverse events.