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

Numerous psychological studies show that weather conditions affect people'smood and that mood states are correlated with people's subjective evaluationof future probabilities. In this paper, a new approach is developed and assetmarket data are employed to test the mood-subjective probability relation. Cloudcover and precipitation volume serve as two mood proxies. Our statistical analysissuggests that bad mood states are characterized by investors placing higher probabilitieson adverse events.