This perhaps wins the award for one of the most bizarre yet fascinating academic finance papers (PDF) regarding environmental effects on the stock market I have seen yet (the paper is also at SSRN). What's more, it provides a direct link between the field of behavioral finance and econophysics, while at the same time potentially providing several stabs in the "death by 1000 cuts" dismantling of the Efficient Market Hypothesis (EMH). It's an older paper (2003), but searching indicates it hasn't really been reported on in the blogging or mainstream financial world, so I thought I'd give it a shot.
The paper by the husband and wife team of Krivelyova and Robotti proposes that the same Geomagnetic Storms (GMS) from the sun that cause the spectacular northern lights or Aurora Borealis (image courtesy US Air force via Wikipedia Update: video) also impacts the stockmarket in a negative way. It turns out that there is a rational explanation here: GMS are well-documented to have all sorts of impacts on human mood and behavior. For instance, one study found that hospital admissions for depression are 36.2% higher when GMS activity is high. The authors cite another study that found that the average number of hospital patients with mental and cardiovascular increases two times over quiet periods. The authors logically make the connection that with all this going on, people would be down on the market during GMS. So how much of an effect did they find, and is it real or just butter in Bangladesh style datasnooping? The authors say:
"This effect is statistically and economically significant, and seems to generate some trading gains. For the US, the GMS effect is similar across indices, ranging from -0.84 to -2.51 percent of average annual returns. We also document a more pronounced GMS effect in the pricing of smaller capitalization stocks. We rationalize this finding by noticing that institutional ownership is higher for large cap stocks, while small cap stocks are being held mostly by individuals."
They say GMS impacted about 10% of the study period. GMS cycles aren't perfectly correlated with sunspot cycles, but they appear to be related. The authors go on to say (emphasis mine):
"The initial phase is associated with compression of the magnetosphere, resulting in an increase in local intensity. This lasts for 2-8 hours. The main phase is associated with erratic but general decreases in background field intensities. This phase lasts for 12-24 hours and is followed by a recovery period that may require tens of hours to a week. Geomagnetic storms are predictable and persist for periods of two to four days. On average, we have 35 stormy days a year with a higher concentration of stormy days in March-April and September-October."
Related Reading:
Sun Downer: More about the authors and their findings.
GMS Data, even predictions of GMS.
Winter Blues: A SAD Stock Market Cycle: "Patterns at different latitudes and in both hemispheres provide compelling evidence of a link between seasonal depression and seasonal variation in stock returns: Higher latitude markets show more pronounced SAD effects and results in the Southern Hemisphere are six months out of phase, as are the seasons. Overall, the economic magnitude of the SAD effect is large."
Stock Market Returns: A note on the temperature anomaly (PDF): "Research in psychology has shown that temperature significantly affects mood, and mood changes in turn cause behavioral changes....We examine many stock markets world-wide and find a statistically significant, negative correlation between temperature and returns across the whole range of temperature."
Would you believe Lunar Cycle effects in stock returns?
Stock returns and the weather: "Sunshine is strongly positively correlated with daily stock returns. After controlling for sunshine, other weather conditions such as rain and snow are unrelated to returns. If transactions costs are assumed to be minor, it is possible to trade profitably on the weather. These results are difficult to reconcile with fully rational price-setting."
NASA's Solor and Heliospheric Observatory with this movie of the sun (MPEG)
Cardiac Arrhythmia and Geomagnetic Activity
Geomagnetic Storms and El Nino (PDF)? "The 3 to 6 year SML cycles also show a surprising agreement with the naturally occurring climate cycles known as El Nino/Southern Oscillations (ENSO). On the basis of SSC and El Ni˜no records from 1968 to 2003, it is found that a warm ENSO phase (El Ni˜no) takes place at about the middle of each of seven identified SML cycles."
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