Summary of Abstract

The authors attempted to prove that:

 Lunar cycles had impact on stock returns.

 It was possible for moon cycles affect human behaviour (in a positive way).

 Earlier evidence of the effect of pervasive variables on stock returns had merit.

Authors’ Motivation & Existing Evidence

For centuries, a large percentage of the world’s population have believed human beings behave

in unusual ways during lunar phases. For instance religious festivities, calendars and several

activities are timed to fall within different phases of lunar months.

In the past, science researchers theorized that moon effects caused negative events because they

assumed it was incapable of causing ‘mild and diffuse effects on human behaviour’. (Dichev and

Janes, 2003)

Dichev and Janes(2003) ‘s decision to undertake this research was inspired by several studies

showing strong relationship between lunar cycles and biological events like feeding,

reproduction sensitivity to light/darkness amongst others.

Dichev and Janes (2003) narrowed their investigation to stock returns because stock prices are

‘powerful aggregators of regular and recurring human behaviour’. The authors noted that there

had been similar works by authorities in this field confirming lunar cycle affected stock returns.

While most of these previous works were not widely published, the research findings were not

statistically significant—rendering them wholly unconvincing.

There was also the small issue of market principles. According to Hickey(2009) ‘the major

argument against lunar cycle effect on stock returns is that it violates the Efficient Market

Y
Hypothesis , which states that all financial instruments reflect information when being bought or

sold.’

Tests on U.S Stocks

Using the synodic lunar cycle, Dichev and Janes (2003) compared stock returns during new moon

with full moon periods. Difference (mean daily return and standard deviation) and persistence

results (number of years in percentage that new moon returns exceeded full moon and the value

of binomial p-values) were carried out in four U.S Stock Indexes using two return specifications

(New Moon & Full Moon +/- 3 and 7 days).The results showed that new moon returns exceeded

full moon returns. In the computation of daily return, dividends were excluded from two of the

exchanges but it did not seem to affect the results 1. In the case of the other two exchanges with

notably shorter periods (The daily returns of NYSE / AMEX Composite Index were calculated

between 1962 and 2000 while that of Nasdaq Composite Index was between 1973 and 2000) the

results were similar2.

The authors also presented a graphical representation of the annualized mean daily returns

which showed that new moon returns exceeded full moon returns by between 4.6% and 8%. One

suspects that the annualized returns for NYSE/AMEX were particularly impressive because

dividends were included during the computation of their results.

1
Dow Jones Industrial Average between 1896 and 1999 showed mean daily returns of new moon returns
exceeded full moon by 0.018% and 0.015% for the 7-day and 15-day specifications respectively while their
persistence results showed Years Difference > 0 was in the range of 56.30% for both specifications. For
Standard & Poor’s 500 between 1928 and 2000, new moon returns exceeded full moon by 0.022% and
0.017% for the two window specifications while the Years Difference > 0 was over 60%
2
The results showed new moon periods outperforming full moon by between 0.021% and 0.026% for over
60% of the period). The results however showed that the t-statistics for both specifications of all the
exchanges were insignificant (between 0.69 and 1.44) and this was attributed by Dichev and Janes (2003) to
the ‘large standard deviation of daily returns, about 1%, which swamps in magnitude the difference in
returns in spite of the very long time series.’
Hickey (2009)’s work corroborates the author’s arguments. Hickey performed regressions (a

different methodology) on data from 1988-2008 for five U.S stock indexes 3. The regression results

strongly suggested that ‘the only significant statistics besides the previous day’s index closing

price were the prices the represented the occurrence of a new moon.’

Generally, for these researches, the authors chose to ignore the possibility that political or

economic factors could have influenced these results in any way.

Stock returns of 24 other countries

Dichev and Janes (2003) updated their earlier literature by including stock return results from

stock indexes of the other members of the G-7 countries and eighteen other countries. To

eliminate countries with undeveloped stock markets, each of the non G-7 countries had stock

market operating for well over 15 years. Also, the authors used only 15-day return specifications.

The t-statistics results of most of the G-7 countries were insignificant with the exception of two

countries (Germany and Canada had t-statistics of 1.75 and 1.88). The Persistence result ranged

between a low of 50%and a high of 64.3% (Germany and Canada while U.S had a persistence

result of 71.4%). Also, difference between the average annualized return for the seven countries

during new moon and full moon periods amounted to 8.36 % which the Authors opined would

comfortably cover ‘the difference between the expected return on a market portfolio and the risk-free

rate’ (Investopedia) for any of the seven countries. Data from stock indexes of these countries were

combined to further strengthen the research using two methods; Pooled data (based on Panel Corrected

Standard Errors) and Equally-Weighted Portfolio. Despite these strong results, the authors acknowledged

that it could be argued that these results were similar to that of the U.S because of the ‘bandwagon effect’

on stock performances in developed countries.

3
Hickey (2009) included indexes that are not well covered by media defeating the argument that ‘most
major averages move together’( for example, the Russell 2000 index consists of small cap stocks which
have been proven to offer lower returns than reputable stocks). Also, key lunar dates (new moon, full
moon, total solar eclipse and total lunar eclipse) were used instead of return specifications.
Stock return results of major indexes from eighteen others countries (periods ranging between 1971-2000)

offered strong support for the Authors’ argument in favour of higher returns during new moon periods.

According to Dichev and Janes (2003) ‘A simple binomial test rejects at a very high level of statistical

significance the probability of observing such one-sided pattern of return difference across (several)

countries by pure chance’4.

Dichev and Janes used their finding from the stock markets of these countries to ‘increase

statistical power’ and ‘to verify the lunar effects (on stock returns) at conventional statistical

levels’.

The result from other countries however showed that Norway was not alone. Hammami et al

(2010) tested the lunar effect hypothesis on the Tunisian stock market 5 and stated that ‘stock

market indices are lower on dates surrounding the dates of new moon than on days surrounding

the date of full moon, in contrast to the evidence presented by the (earlier) literature and

presumed assumptions.’ Statistical results from Liu (2009)’s work also supported lunar effects on

stock returns in the U.S while acknowledging that different patterns were shown by the G7

markets and some of the discussed emerging Asian markets6.

Additional evidence

4
The stock returns for the countries during new moon period exceeded full moon period significantly (by between
0.098%- Indonesia and 0.001%- Thailand) with the exception of Norway which had a difference of zero for the
research period. The Persistence results for Norway was also negative (42.9%) while the rest showed an impressive
range of 50% (South Africa) – 75% (Singapore). The results from the combined data of these countries also showed
higher returns during new moon periods with the PCSE and equally-weighted portfolio methods offering differences
of 0.035% and 0.034% while their t-statistics results were insignificant. The most striking data was the positive
difference of 9.29% between the average of annualized return for new moon and that of the full moon.
5
Hammami et al (2009) used two indexes (TUNINDEX and BVMT between 1998 and 2008), four window
specifications (15-day, 7-day, 3-day and 1-day) around full moon and new moon days using mean daily
return and regression methods. The tests favoured full moon periods (with the exception of the 3-day
specification of the BVMT index).
6
Liu (2009)’s paper investigated the association between the lunar phases and daily stock returns by using
a two-regime autoregressive model with a GARCH (1,1) innovation to examine the average daily returns,
the correlation between consecutive daily returns, and the GARCH volatility (within the G-7 countries and
five Asian emerging markets).
Dichev’s investigation of the volatility of stock returns during lunar phases showed that while

the mean standard deviations of stock returns during new moon period were greater than those

of full moon in the U.S, the stock return volatility difference between new moon and full moon

periods for 15 of the tested countries was insignificant. Dichev was also unable to prove the

existence of lunar effect on volumes of stock traded. These evidences corroborated the authors’

argument that lunar effects recorded on stock return were independent of stock volatility and

volume. A similar investigation by Yuan et al (2006) using regression test for an equally-weighted

portfolio and a panel of 48 countries also showed that trading volume and risk differentials

between new moon and full moon periods were not responsible for the higher stock returns

recorded during the former period. Their research also ruled out the possibility that the detected

lunar effects on stock returns were caused by macroeconomic announcements, global shocks or

calendar anomalies.

Finally, Dichev (2003) tried to find out if lunar cycles affected bond returns and interest rates in

the same as they did stock returns (this was based on the market belief that stock appreciation

can be ascribed to a drop in interest rates which also causes bond yields to rise as investors dump

it for high returns stocks may offer)7. 15-day return specifications were used to test these related

economic variables over two time periods; 1915-1970 and 1971-19998. During both periods, the

statistics proved that lunar cycles on stock returns was not due to either of these variables but

instead seemed likelier to affect ‘asset classes with higher risk.’ 9

Conclusion

7
The Dow Jones Bond Average was used for the test because it offered the longest daily price history and
bond tenors of between 10 and 20 years (naturally, accrued interest was excluded from bond yields the
same way dividends were excluded from some stock indexes).
8
For interest rates, U.S 3-month commercial papers were considered a good indicator of risk free interest
rates.

9
Hickey (2009) also carried out regression tests on 10 year Treasury bond note to test the principle that
asserts an inverse relationship between bond yields and stock returns. The regression results showed that
bond yields rose by an average of 0.02% along with higher stock returns around new moon periods.
Evidence from various test taken globally show that higher stock returns of significant economic

value were recorded around new moon periods. Dichev and Janes (2003)’s work proved that the

effects of lunar phases extend beyond investor mood to economic events questioning traditional

theories and principles that assume investor decisions are based on market factors and devoid of

irrationality.

This research is supported by past literature in different fields (psychology, biology, medicine)

that theorized that mood affects people’s interpretation of information and decisions.

This writer agrees with the research due to the enormous evidence presented by the author and

other writers like Yuan et al. (2006), Hickey (2009) and Shu-Ing Liu. Other works that suggested

otherwise were also noted. In the case of Rotton and Rosenberg (1984)’s study on the Dow Jones

Index prices, two reasons can be given for their conclusion. First, stock prices were used instead

of return. Also, their return statistics did not adequately correct for heteroscedasticity and

autocorrelations. Hammami et al (2010)’s work on the Tunisian stock exchange also suggested

that stock returns may be significantly higher during full moon periods in some emerging

markets. Even these could be argued in favour of lunar effect as the statistics in favour of full

moon returns were significant.

It is the opinion of this writer that the test statistics should be widened to cover all exchanges in

all investigated countries to offer stronger evidences. New methodologies could also be devised.

Dichev and Janes (2003) expressed their hope that the evidence put forward in their research

would spur further research on the possible effect of lunar effect/mood on several traded asset

classes (commodities, futures, options, derivatives e.t.c) in many other imaginable circumstances.

I share this hope with them as I am confident that such researches would greatly benefit

behavioural science.