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AbstractThis paper examines whether people's mood and optimism affect economic activity. We consider two sets of exogenous proxies for optimism that are unrelated to the economic environment: (1) weather (average temperature and cloud cover) and (2) sports and political optimism. We show that economic recessions are weaker and expansions are stronger in the United States where local individuals are more optimistic. Further, local optimism has a stronger impact on state‐level business cycles of smaller states and regions with low levels of risk sharing. In contrast, the incremental effects of local optimism are weaker in states where people are younger, more educated and sophisticated, and socially more connected. States with larger concentration of minority and urban population also exhibit lower sensitivity to variations in mood and optimism. Alternative explanations based on the state's industrial composition, tax environment, migration, seasonal affective disorder (SAD), oil shocks, and direct economic impact of weather cannot explain these findings.

AbstractWe show that geographical variation in the level of investor sophistication influences local asset prices. Investors in less sophisticated regions exhibit stronger trading correlations, and correspondingly, the returns of firms headquartered in less sophisticated areas are more strongly correlated. Furthermore, we show that local economic conditions have a greater ability to predict local stock returns in the U.S. states with less sophisticated retail investors. These asset pricing results are driven by the sophistication of actual local investors, and not by the characteristics of the broader local population.

AbstractThis study shows that the geographic network of public firms facilitates the propagation of local economic conditions across the United States. We identify economic connections among U.S. states based on the 10‐K listings of public firms and show that the returns and liquidity of firms headquartered in connected states exhibit excess comovement. The economic connections also generate spillover effects where the economy of a state affects its connected states and amplifies the impact of local economic conditions on the U.S. economy. In particular, a 1% production increase in a large state like California is associated with a 6.71% change in annual U.S. GDP growth, relative to average GDP growth.