Market Moons

CFO.com recently cited a very interesting study — using a rather exhaustive data set, researchers Ilia Dichev and Troy Janes found a significant correlation between lunar cycles and stock market returns! While they claim that their findings are insufficient for developing a trading strategy, they still provide an opportunity for speculation of the intellectual sort, on causative mechanisms or possible sources of spurious correlation. Could human behaviors be influenced by natural phenomena that are assumed to have no direct or discernible (much less measurable) impact on people?

Whatever the eventual answer, the study raises the ghost of classical English economist Stanley Jevons, and perhaps dusts off his marginalized (pun intended, econo-nerds!) sunspot theory of the business cycle. The following description is excerpted from the Jevons profile at CEPA New School’s HET website:

In 1875 and 1878, Jevons read two papers before the British Association which expounded his famous "sunspot theory" of the business cycle. Digging through mountains of statistics of economic and meteorological data, Jevons argued that there was a connection between the timing of commercial crises and the solar cycle. The basic chain of events was that variations in sunspots affect the power of the sun’s rays, influencing the bountifulness of harvests and thus the price of corn which, in turn, affected business confidence and gave rise to commercial crises. Jevons changed his story several times (e.g. he replaced his European harvest-price-crisis logic with an Indian harvest-imports-crisis channel). However flimsy his explanations, Jevons believed that the periodicity of the solar cycle and commercial crises — approximately 10.5 years, by his calculations — was too coincidental to be dismissed.

To this day, Jevons’ sunspot theory tends to elicit snorts of derision from educated sorts, but as an explanation for business cycles in closed agrarian economies, it strikes me as a fairly reasonable conjecture. Explaining Dichev and Janes’ lunar cycle finding seems a lot trickier, but fun, so here’s an initial stab: the additional light available around full moons encourages a greater degree of nocturnal behavior, which leads to a larger number of traders nursing hangovers, and thus inspires a marginally higher level of pessimism in the stock market on those days…

Hey, we’re reaching, but at least we’re not snorting.

Happy 2007!!!