Tuesday, August 9, 2011

Market Volatility: It's the Sun What Done it!! "Playing the Field: Geomagnetic Storms and the Stock Market" -Atlanta Fed Paper

Following up on Saturday's "Power companies prepare as solar storms set to hit Earth":
...Earth's magnetic field is still reverberating from a CME strike on August 5th that sparked one of the strongest geomagnetic storms in years. Registering 8 on the 0 to 9 "K-index" scale of magnetic disturbances...
We have this from NOAA's Space Weather Prediction Center:

Top News of the Day

1400Z, August 9, 2011 - The largest flare of the solar cycle, an R3 (Strong) Radio Blackout, alternatively classified as an X6, occurred today at 0805Z. Region 1263, now poised near the west limb, produced the event and a few others of lesser magnitude in the past day. The region remains hot at this writing....

NOAA Scales Activity

Range 1 (minor) to 5 (extreme)
NOAA Scale
Geomagnetic Storms *
Solar Radiation Storms
Radio Blackouts

And from the Fereral 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....
...MORE (53 page PDF)

HT: Marginal Evolution who notes:
...Authors, Anna Krivelyova and Cesare Robotti , find that, during solar activity, the market sell-off is global and that small caps are affected more....