Article Summary Dichev and Janes (2003, henceforth D & J) attempted to prove the existence of lunar effects on stock

returns. They explored the possibility that moon cycles could positively influence human behaviour and that earlier evidence of the effect of pervasive variables on stock returns had merit. The writers narrowed their investigation to stock returns because stock prices are powerful aggregators of regular and recurring human behaviour (Pg.9). However, according to Hickey (2009) the major argument against lunar effect is that: It would be a complete violation of the Efficient Market Hypothesis, which states that all financial instruments reflect perfect information when being bought or sold. (Hickey 2009:2)

Therefore, D & J (2003) attempted to disprove this hypothesis and other traditional theories of asset pricing that suggest investors decisions are rational and influenced majorly by market factors. Using the synodic lunar cycle, D & J (2003) compared stock returns during new moon with full moon periods. Return difference and persistence results were carried out in four U.S Stock Indexes and in 24 other countries (G-7 and 18 emerging markets). The authors also examined the possibility that economic variables such as stock volatility and volume, interest rate changes, bond yields influenced the recorded lunar effects.

Support for Authors theory Liu (2009: 3) in his research cited several behavioral finance studies by experts (Schwarz and Bless, 1991, Kamstra, Kramer, and Levi, 2000; Loewenstein, 2000; Mehra and Sah, 2000; Hirshleifer, 2001; Coval) that indicated that mood influences human decision making and buyers valuation of asset returns. These earlier works inspired D & J (2003) and through their study, they observed that: new moon returns exceeded full moon returns persistently in the U.S and all of the other 24 countries except one (the difference was not significant in some cases); the difference between the annualized return during new moon and full moon periods would comfortably cover the difference between the required return on a market portfolio and the risk-free rate for most of the countries; the observed results were also not due to stock volatility, volumes , interest rate changes or bond yields. Liu (2009: 8) tested the relationship between lunar effect and daily stock prices for G-7 and 5 other emerging Asian markets by examining their average daily returns, correlation between consecutive daily returns, and the GARCH(described as a comprehensive adaptation of autoregressive conditional heteroscedasticity model used to predict the volatility of asset prices) noting that:

For most of the G-7 markets, the mean daily returns are higher in the new moon period than in the full moon period these findings are very much in line with the conjecture that stock returns are affected by dissimilarities in investor demographics and by the efficiency of the stock market, as well as investor mood, irrationality and overconfidence, especially during the full moon period. (Liu 2009:16) D & J (2003) found support from Yuan et al (2006: 16) in their paper which used regressions method to prove that stock volatility and volume differentials between new moon and full moon periods were not responsible for the detected lunar effect in stock returns for forty eight countries. Hickey (2009) also strengthened the authors argument by carrying out regression tests on 10 year Treasury bond notes to test the principle that asserts an inverse relationship between Bond yields and stock returns. As the results show with each occurrence of a new moon relative to a normal day, the yield on the 10 year Treasury bond note is higher ... (Hickey 2009: 5) Although several researches offer alternative arguments, few question the credibility of the authors work with Burrell of the Harvard business review stating that their findings are a product of rigorous research (2006: 1).

Criticisms of Authors theory Chandy et al (2007) noted that earlier unpublished works by some writers opposed the theory of lunar effect on stock returns:

Rotton and Kelly (1985) however, suggest that lunar phase is not related to human behavior. Rotton and Rosenberg (1984) studied the effect of lunar cycles on the stock market by relating Dow Jones closing averages to different phases of the moon over the period 1975 to 1979. Their preliminary evidence indicates abnormal values for the Dow Jones industrial average around time periods when the moon is near the earth and when it is far from the earth. (Chandy et al 2007: 3)

D & J (2003) drew strong criticisms from Herbst (2007) who claimed they did not use log of return relatives to avoid unbiased return and questioned their failure to mention tests for normality on return or volatility: D & J (2003, p. 23) strangely report that daily volume and first differences in daily volume are highly non-normal, but do not address the question of normality for either returns or volatility (Herbst 2007)

Also, Liu (2009)s investigation of 5 emerging markets in Asia (Hong Kong, Shanghai, Singapore, South Korea and Taiwan) suggested that lunar effect on stocks can only be proven in developed countries and countries with strong economic ties to them:

In contrast, the results for some of the Asian markets are the opposite: there are slightly higher mean daily returns in the full moon period, though not very strong. The autocorrelation between consecutive daily returns is also positively correlated in the new moon period. Hong Kong due to its close connection in terms of international trade and finance with developed countries, although in Asia, shows results that are rather similar to those of the G-7markets. (Liu 2009:15-16)

Similar results were noticed in other emerging markets by Hammami and Abaoub (2010, Tunisian stock market) and Gao (2009, Chinese stock market). Hammami et al (2010: 15)s results show full moon returns insignificantly exceeded new moon returns in most cases with the exception of 3-day return specification of the BMVT index where new moon returns significantly exceeded full moon returns. Is this observation an endorsement of lunar effect?

Some of the authors results also raised questions: Why were the binomial tests statistically significant? Does the fact that the persistence results were not very high (except for U.S and Singapore results) weaken the credibility of the research?

Conclusion This review considers the hypothesis of lunar effect on stock returns to be credible. Despite its limitations particularly the inability to prove the effect extensively in countries without strong ties to developed economies, the study (with the research of other experts who applied different methodologies) provided valid evidence which included tests from emerging markets and ruled out the influence of economic variables on the observed lunar effects.

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