Lunar Cycle and Stock Returns
Posted in Animal Spirits, Calendar Effects
October 13, 2011
Does the lunar cycle affect the behavior of investors/traders, and thereby influence stock returns? In the August 2001 version of their paper entitled “Lunar Cycle Effects in Stock Returns” Ilia Dichev and Troy Janes conclude that: “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 U.S. stock indexes over the last 100 years and for nearly all major stock indexes of 24 other countries over the last 30 years.” To refine this conclusion and test some recent data, we examine U.S. stock returns during intervals relative to the dates of new and full moons since 1990. When the date of a new or full moon falls on a non-trading day, we assign it to the nearest trading day. Using dates for new and full moons for January 1990 through September 2011 as listed by the U.S. Naval Observatory (269 full and 269 new moons) and contemporaneous daily closing prices for the S&P 500 Index, we find that:
The following chart summarizes average S&P 500 Index returns over the 11 trading days (about half a month) centered on new moons or on full moons over the entire sample period, during the 1990s and during the 2000s. Results are in rough agreement with the conclusion of the study cited above, with intervals centered on new moons outperforming those centered on full moons.
The standard deviation of 11-day returns over the entire sample period is 3.10% (3.65%) centered on new (full) moons, large compared to the difference in average returns.
Can we refine the interval of new moon outperformance?
The next chart compares average S&P 500 index returns over the entire sample period for three intervals relative to new or full moons: (1) the five trading days just before full or new moons; (2) the five trading days centered on new or full moons; and, (3) the five trading days just after new or full moons. Results suggest that the outperformance of intervals around the new moon comes mostly from returns immediately during the new moon.
The standard deviations of 5-day returns for these intervals over the entire sample period are in the range 2.1%-2.7%, large compared to the difference in average returns.
Might any lunar effects stem from the waxing or waning of the moon rather than new or full moons?
The next chart compares average S&P 500 index returns for the intervals of waxing and waning between new and full moons over the entire sample period, during the 1990s and during the 2000s. Results consistently indicate that the waxing moon (new-to-full) interval on average outperforms the waning moon (full-to-new) interval.
The standard deviation of returns over the entire sample period is 2.92% (3.21%) for waxing (waning) moons, large compared to the difference in average returns.
Can more granular data help explain why intervals around new moons and during waxing moons outperform those around full moons and during waning moons?
The final charts present the average daily detrended S&P 500 index returns from 11 trading days before new and full moons to 11 trading days after new and full moons. The total interval covered in each chart is roughly a month, but mismatches between lunar and monthly cycles introduce differences between them. We detrend by subtracting the average daily return for the entire sample period from the raw average returns for each trading day in the intervals tested. These charts provide some insight into the less granular results above. However, the lack of systematic variation in daily returns undermines belief in the lunar cycle as the explanation of new-full and wax-wane differences in average returns.
Physicist Charles Pennington employs a quite different approach using a Fourier transform, concluding that lunar cycle effects on SPY are, if they exist, very small.
In summary, evidence from simple tests indicates that the U.S. stock market since 1990 performs better on average around new moons than full moons, and during waxing moons than waning moons.
Cautions regarding findings (as noted above) include:
- Levels of outperformance are small compared to market variability, so trading them is very risky.
- Levels of outperformance are not convincingly consistent across subperiods and daily returns.
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