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Playing
the Field: Geomagnetic Storms and the Stock Market
Federal Reserve Bank of Atlanta
Abstract: Explaining movements
in daily stock prices is one of the most difficult tasks
in modern finance. This paper contributes to the existing
literature by documenting the impact of geomagnetic
storms on daily stock market returns. A large body of
psychological research has shown that geomagnetic storms
have a profound effect on people's moods, and, in turn,
people's moods have been found to be related to human
behavior, judgments and decisions about risk. An important
finding of this literature is that people often attribute
their feelings and emotions to the wrong source, leading
to incorrect judgments. Specifically, people affected
by geomagnetic storms may be more inclined to sell stocks
on stormy days because they incorrectly attribute their
bad mood to negative economic prospects rather than
bad environmental conditions. Misattribution of mood
and pessimistic choices can translate into a relatively
higher demand for riskless assets, causing the price
of risky assets to fall or to rise less quickly than otherwise.
The authors find strong empirical support in favor of
a geomagnetic-storm effect in stock returns after controlling
for market seasonals and other environmental and
behavioral factors. Unusually high levels of geomagnetic
activity have a negative, statistically and economically
significant effect on the following week's stock returns
for all U.S. stock market indices. Finally, this paper
provides evidence of substantially higher returns around
the world during periods of quiet geomagnetic
activity.
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