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Contribution Details
| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Trading the Moon- do Lunar Phases Affect European Stock Market Returns?" |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 40 |
| Date | 2020 |
| Zusammenfassung | The idea that lunar phases affect behavior and mood dates back to ancient times. The lunar effect on the human body and mind is suggested in the psychological literature. In psychological research, the full moon is associated with a depressed mood (e.g. Campbell and Beets (1978)). Put into context with behavioral finance, capital market returns are expected to be lower in the days around the full moon than around the new moon. This paper examines if there is a lunar effect on European stock market returns and if lunar effects are translatable into a trading strategy beating a buy-and-hold strategy. To find answers to these questions, first, the psychological literature on lunar effects is reviewed and combined with efficient market and decision-making theories. Also, studies dealing with the impact of weather, temperature and geomagnetic activity, seasonal anomalies and previous research on the lunar cycle and stock market returns around the world are reviewed. Starting the analysis, daily returns were assigned to each day of the lunar cycle and separated into waning and waxing phases. On average, waning phases perform considerably better than waxing phases from 1987 to 2019. In addition, the findings of this work are independent of seasonal anomalies such as the January effect, the Monday effect, and the turn-of-the-month effect. The conclusions are in line with the results of Sutor Bank (2019), testing the S&P500 over the last 100 years. Examining single full moon and new moon returns for European indices, one can conclude that returns on new moon days are significantly higher than 1) overall and 2) full moon days. Full moon returns do not stand out significantly negatively. This observation contradicts the empirical findings of psychological research, where the full moon is associated with aggressiveness and mood disorders (e.g. Huston and Passerello (1971)) and therefore biased decision making and negatively impacting returns. The difference between new and full moon returns is in line with previous research (e.g. Dichev and James (2003)). The days around the new and full moon do not face an effect of the same magnitude. The difference in returns vanishes if one considers three or more days around the full moon and the new moon, respectively. While Yuan, Zheng, and Zhu (2005) find mid- and small-cap stocks with an even higher lunar effect, in this analysis German small- and mid-cap indices face the smallest new moon effect belong the stock indices. These conclusions are translated into two trading strategies. Both avoid investments during a part of the waxing phase and hence beat the buy-and-hold strategy for the majority of the indices from 1987 to 2019 with respect to average annual performances and Sharpe ratios, transaction costs not being considered. Due to the nature of the trading strategy of buying and selling approximately 24 times a year the adding of transaction costs erases most of the annual excess return. The bid-ask-spreads play the role of a game-changer, as they make up the largest part of transaction costs. Finally, the future role of moon trading in relation to algorithmic trading is discussed, and a possible explanation of the new moon effect is drawn by combining the turn-of-the-month effect with the Islamic and Jewish calendar. |
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