Moonstruck investment

New grass thrives on spring showers, sunflowers bloom in the summer heat and many anglers insist that their catches respond according to the phases of the moon - so why shouldn't share market investments be affected by the same forces?

No, don't laugh, this is a serious proposition, which has been the subject of serious research, and with the potential of helping investors make serious money.

Three groups of academics at the University of Michigan and Ohio State University have been studying the effects of the weather and the moon on sharemarkets around the world and their papers all conclude that, yes, there is a pattern.

The business magazine The Economist, after examining the three papers, agreed that investing by the lunar cycle "would have been profitable even after trading costs".

Similarly, it accepted that "investing by the sun would have been more profitable than simply investing in the market index even after subtracting trading costs."

However, The Economist also warned that now that investors had been alerted to the effect they "will probably arbitrage away any excess returns to be had by exploiting it".

That may be, but the possibility that the weather and the cycles of the moon can affect human behaviour is really not so strange.

As the researchers point out in their papers, casual intuition and psychological evidence both suggest that people feel more upbeat when the sun is shining. So would it really be surprising if investors feel more optimistic on bright, sunny days and pessimistic on dark, cloudy days?

Likewise, while it has yet to be proved that the moon affects human behaviour, there has for thousands of years been a body of belief that abnormal behaviour peaks around the full moon.

If the full moon does have a depressing effect on people it would be natural to expect it also to depress investment. That is what the three studies set out to investigate.

Kathy Yuan and Lu Zheng, both of the University of Michigan Business School, and Qiaoqiao Zhu of the university's economics department, studied the effect of lunar cycles on share returns in 48 countries, including New Zealand, over periods of up to 35 years.

Their study, asked the question, "Are Investors Moonstruck?" and concluded that indeed they are. On average, they found share returns are better in the period around a new moon than a full moon.

Their calculations show that over the 48 countries returns average 6.6 per cent less for the 15 days around a full moon than for the 15 days around a new moon.

If the lunar effect is even more tightly focused, by comparing 7-day windows, the period around a new moon outperforms the full moon by 8.3 per cent.

The study found the moon has a greater impact on smaller emerging markets than on the big developed markets and is more pronounced for small stocks (more likely to be held by individual investors) than for large stocks (more likely to be held by institutions).

The effect of the lunar cycle on the New Zealand sharemarket, which was studied from 1980 to 2001, was about average for a developed economy.

D URING a 7-day lunar period, on average stocks performed 3.22 basis points better during a new moon than during a full moon, and during a 15-day period the difference was 5.01 points.

Interestingly, Australia was one of the few exceptions. Its sharemarket did better (by 1.2 basis points daily) during the seven days around a full moon than during a new moon which undoubtedly says something about Australian investors.

Ilia Dichev and Troy Janes, both of the University of Michigan Business School, reached a similar finding.

Their paper, entitled "Lunar cycle effects in stock returns", initially looked at US share prices over 100 years and then expanded to include 24 other countries mostly over a 30-year period.

Their conclusion: "We find strong lunar cycles in stock returns. Specifically, returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates.

"This pattern of returns is pervasive; we find it for all major US stock indexes over the last 100 years and for nearly all major stock indexes of 24 other countries over the last 30 years."

David Hirshleifer, of Fisher College of Business, Ohio State University, and Tyler Shumway, of the University of Michigan Business School, looked at the effect of the weather on the 26 stock exchanges between 1982 and 1997.

Their paper, "Good Day Sunshine: stock returns and the weather", found that on days with sunny mornings shares generate above-average returns. Unusually cloudy days generate lower gains.

In some exchanges the effect was quite significant. In New York, for instance, annualised returns on shares traded on perfectly sunny days averaged 24.8 per cent, compared with 8.7 per cent on perfectly cloudy days.

"Our findings," the researchers conclude, "suggest that those investors who can trade a stock index with small transaction costs could have benefited ... from weather-based trading strategies".

However, they believe the main implication of their work is more indirect. "Our results suggest that investors can benefit from becoming aware of their moods in order to avoid mood-based errors in their judgments or trades."

What should we make of all this? The Business Herald did its own rather crude study just for interest.

In May this year the NZSE-40 index rose by an average of 3 points a day. But on days when it was sunny in Auckland it rose by an average of 10.1 points. Surprisingly it also rose by an above-average 8.6 points on rainy days. Nevertheless, that does seem to support the theory that trading is more positive on sunny days.

For the 18 months from January last year to June this year the top-40 index rose by an average of 0.9 points. On days with a full moon the index rose an average of 4.8 points while on days with a new moon it fell by 128.2 points.

That, of course, is exactly the opposite effect to that found by the academic studies, which goes to underline the warning in all three papers that what matters is long-term trends, because short-term movements can be the result of "background noise".

So should you invest by the moon or the sun? Well, if it's a sunny day and the new moon is riding high and you feel like buying shares in Acme Global, just make sure the numbers look right too.