We analyze the flow of money between mutual fund categories, finding strong evidence of seasonality in investor risk aversion. Aggregate investor flow data reveal an investor preference for safe mutual funds in autumn and risky funds in spring. During September alone, outflows from equity funds average $13 billion, controlling for previously documented flow determinants (e.g., capital-gains overhang). This movement of large amounts of money between fund categories is correlated with seasonality in investor risk aversion, consistent with investors preferring safer (riskier) investments in autumn (spring). We find consistent evidence in Canada and also in Australia, where seasons are offset by 6 months.

We make the case for the U.S. government to issue a new security with a coupon tied to the United States’ current dollar GDP. This security might pay, for example, a coupon of one-trillionth of the GDP, and we propose the name 'Trill' be used to refer to this new security. This new debt instrument should be of great interest to the Government for its stabilizing influence on the budget (as coupon payments fall in a recession with declining tax revenues) and for its yield, based on our valuation. Standard asset pricing analysis also suggests that Trills would enable important new portfolio diversification strategies and, in contrast to available assets that protect relative standards of living in retirement, Trills would have virtually no counterparty risk. We believe there would be a lively appetite for the Trill from institutional investors, public and private pension funds, as well as the individual investor.

We demonstrate a novel and striking annual cycle in the US Treasury market, with a variation of over 80 basis points from peak to trough in monthly returns. The Treasury return seasonal pattern is opposite to that evident in equity returns, and the opposing patterns are not due to unconditional negative correlation between Treasury and stock returns. We show that the seasonal Treasury and equity return patterns are unlikely to arise from macroeconomic seasonalities, seasonal variation in risk, cross-hedging between equity and Treasury markets, investor sentiment, seasonalities in the Treasury market auction schedule, seasonalities in the Treasury debt supply, seasonalities in the FOMC cycle, or peculiarities of the sample period considered. The seasonal cycles become more pronounced during periods of high market volatility, consistent with the notion that the seasonal cycles are a result of time-varying risk aversion among market participants. The seasonal patterns in equity and Treasury returns are coincident with the incidence of seasonal depression observed clinically in North American populations, and depression has been shown to be associated with reduced risk tolerance. The White (2000) reality test confirms that the correlation between returns and the clinical incidence of seasonal depression cannot be easily dismissed as the simple result of data snooping. Our findings are all the more remarkable given that it is expert traders who dominate the Treasury market.

We analyze the flow of money between mutual fund categories, finding strong evidence of seasonality in investor risk aversion. Aggregate investor flow data reveal investor preference for safe mutual funds in autumn and risky funds in spring. During September alone, outflows from equity funds average $13 billion, controlling for previously documented flow determinants (e.g., capital-gain overhang). This movement of large amounts of money between fund categories is correlated with seasonality in investor risk aversion, consistent with investors preferring safer (riskier) investments in autumn (spring). We find consistent evidence in Canada, and in Australia where seasons are offset by six months.