Researchers link solar storms to
market lows
The solar storms that buffeted Earth's atmosphere
last October produced spectacular auroras, caused surges in Canada's
electrical grid, and briefly disrupted radio contact with airliners.
According to analysis by Anna Krivelyova, a Ph.D. candidate in economics
at Boston College, and her husband, Cesare Robotti, who earned his doctorate
in economics from BC in 2002, those emissions of electrically charged
solar gases also sent stock markets around the globe on a short downward
trip. Krivelyova and Robotti first laid out their theory in "Playing
the Field: Geomagnetic Storms and International Stock Markets,"
published in March 2003 as part of an ongoing series of papers sponsored
by the Federal Reserve Bank of Atlanta.
Geomagnetic solar storms occur approximately
35 days per year. For their study, Krivelyova and Robotti
correlated the dates of all such storms over the past 70 years
with the behavior of 12 of the world's stock markets over
the same period. An unmistakable pattern emerged: When the
sun flares up, the markets go down. The condition lasts for
about six days after the storms end.
Numerous studies have shown that solar storms
affect our mood, which can in turn affect our behavior. One 1994 report
in the British Journal of Psychiatry cited by Krivelyova and
Robotti shows a 36.2 percent increase in hospital admissions for depression
during the storms. A 1992 paper published in the Russian Aviakosm
Ekolog Med shows that during solar storms, pilots experience increased
stress and a sharp decline in flying skills. A Russian study from 1998,
based on data from Moscow's ambulance corps, found that suicides and
mental disorders, along with cardiovascular incidents—which are
often stress related—spike during periods of increased geomagnetic
activity.
Krivelyova and Robotti are the first to relate
the phenomenon to economic behavior. Their analysis hinges on what they
term "misattribution of mood." Some investors, they argue,
become nervous or depressed during geomagnetic storms. Their perceptions
of market conditions then take a dark turn and—unaware of the
true source of their changed mood—the investors decide to dump
stocks that, under normal circumstances, they would have held. The aggregate
effect is an overall decline in the world's stock markets.
Krivelyova and Robotti controlled for other mood-altering
factors such as weather and time of year. They found that drops in the
value of stocks owing to geomagnetic storms are indeed substantial.
An investor with $1,000 in Great Britain's FTSE 100 index, they
point out, would have earned an average of $139 annually during the
eight decades, barring solar storms. Instead, earnings on $1,000 were
only $96.80 per year—a 30 percent loss in income. The storms had
similar effects on other stock indexes the authors studied, including
the Nasdaq and the Standard & Poor's 500 in the United States,
as well as major indexes in Japan, Australia, Canada, Sweden, and New
Zealand.
The researchers also found that the solar storms
have a greater effect on the prices of stocks of smaller companies (those
with lower market capitalizations), which tend to be held by individual
investors, than on stocks of larger companies, which tend to be held
by institutional investors such as mutual funds and pension funds. Small
investors, Krivelyova and Robotti explain, are more likely to buy or
sell a stock on the basis of emotion, while institutional investors
tend to use computer programs to guide their decisions.
"PLAYING the Field" is part of a new—and controversial—area
of economics called behavioral finance, which challenges the long-standing
assumption that investors make decisions purely according to rational
self-interest. Rationalist theories have never fully explained the widespread
irrational market behavior that does erupt from time to time—the
most recent example being the 1990s market bubble. In A General Theory
of Employment, Interest, and Money, the contrarian economist John
Maynard Keynes tried to account for an earlier outbreak, the Great Depression,
and the years immediately preceding it. Why had stock prices increased
beyond all reason in the 1920s, he wondered, and why, after the crash,
did investors refuse to return to the market for years after any reasonable
assessment would have revealed numerous opportunities for profit?
Keynes blamed what he called "animal spirits,"
the whatever-it-is that sometimes makes people take outlandish risks
and sometimes fills them with baseless fears. Mainstream economists
dismissed his idea as too vague to have any predictive value. The study
of geomagnetic storms represents a behaviorist end run around their
objections. "We wanted to study the effects of mood on market
performance," Krivelyova said. "Geomagnetic storms were
just a proxy. So far the results have been indestructible."
But don't expect to make a fast buck the
next time a geomagnetic storm erupts. The fact is, when it comes to
investing, good predictive frameworks inevitably undermine themselves.
Since the discovery of the Monday Effect, for example—that's
the tendency of Wall Street stocks to drop on Monday mornings, when
traders are grumpy about being back at work—its magnitude has
greatly diminished, as traders have learned to resist the irrational
urge to sell. Krivelyova and Robotti expect the same thing to happen
if their theory about geomagnetic storms and misattribution of mood
ever makes it to the trading floor. "Once everyone becomes aware
of the information, the market becomes efficient again, and you can't
make money anymore," Krivelyova said. "Or"—the
good news—"lose it."
Tim Heffernan
Tim Heffernan is a freelance writer based in New York City.
Photo: Anna Krivelyova and Cesare Robotti.
By Billy Howard
Graphic adapted from "Playing
the Field," 2003
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