Curious paper from The Federal Reserve on the effects of geomagnetic storms on stock markets

Explaining movements in daily stock prices is one of the most difficult tasks in modern finance. A recent working paper contributes to the existing literature by documenting the impact of geomagnetic storms on international 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 they otherwise would.

Authors Anna Krivelyova and Cesare Robotti 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 and statistically significant effect on the following week’s stock returns for nine out of 10 countries and 12 out of 13 indices in the authors’ sample. The paper also provides evidence of substantially higher returns around the world during periods of quiet geomagnetic activity. The effect appears to be relevant from an economic point of view.

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