Daylight saving effect – paper review

The daylight saving effect argues that sleep disruption caused by daylight saving time changes results in a negative impact on stock returns on the trading day following the changes.

Even if the effect does exist it’s unlikely to be economically significant, but it is interesting to academics in the context of behavioral finance and whether external factors (such as the weather) can influence the mood of investors sufficiently to affect share returns.

Compared to other market anomalies this is a pretty straight-forward one; the academic debate has largely centered around methodology.

This article presents a brief review and listing of academic papers on the daylight saving effect.

An academic paper in 1976 found that transitions to and from daylight saving time (DST) caused sleep desynchronosis (disruptions). One paper described it as having an effect similar to jet lag. In 1980 a paper claimed that DST changes led to an increase in traffic accidents; while another paper a little later claimed it led to a decrease in accidents. Oh well.

As far as we’re concerned the story starts in 2000 when Kamstra, Kramer and Levi found that in the US, UK, Canada and Germany DST had a negative impact on stock returns on the trading day following the changes. They called this the daylight saving anomaly. A new anomaly – this was quite exciting, nowadays there aren’t that many new anomalies found in stock markets (certainly not in developed markets).

Anyway, this got the ball rolling.

Unfortunately not many others agreed with them. First up was Pinegar (2002) who looked at the US market and only found significance for the autumn DST changes, and that that was attributable to two data outliers for the market in October 1987 and October 1997. Kamstra, Kramer and Levi (2002) replied quickly to this maintaining their claims by showing that the distribution of returns on days following DST changes shifted to the left.

Next up was Worthington (2003) who found no effect in the Australian market. Lamb, Zuber and Gandar (2004) replicated and agreed with the findings of Pinegar (2002) and aggressively concluded that the original findings of Kamstra, Kramer and Levi (2000) “did not survive serious scrutiny”.

The disagreements continued with Müller, Schiereck, Simpson and Voigt (2009) who found no daylight saving effect in European bond and equity markets.

Gerlach (2010) had a different slant, claiming that any correlation between stock returns and DST changes was not due to the daylight saving effect but rather to seasonal patterns in market-related information.

Gregory-Allen, Jacobsen and Marquering (2010) criticized the original paper for using too little data; and crunched the numbers on 22 markets and over a longer period. They found no evidence of an observable DST effect on stock returns.

Berument, Dogan and Onar (2010) widened the study to look at volatility as well as stock returns, and found no DST effect. This started a merry game of paper ping-pong with Kamstra, Kramer and Levi (2010) replying with a “comment” that criticized the analysis of Berument, Dogan and Onar (2010) and maintaining the effect was still in place. Berument and Dogan (2011) replied with a “reply”, effectively saying, “isn’t”. Which prompted Kamstra, Kramer and Levi (2013) to reply with a “rebuttal” to the “reply” to the “comment” effectively saying, “is”.

INDEX (of papers listed below)

[Papers listed in reverse date order; ♠ indicates major paper.]

Effects of daylight-saving time changes on stock market returns and stock market volatility: rebuttal
Authors [Year]: Mark J. Kamstra and Lisa A. Kramer and Maurice D. Levi [2013]
Journal [Citations]: Psychological Reports, 112(1), pp89-99
Abstract: In a 2011 reply to our 2010 comment in this journal, Berument and Dogen maintained their challenge to the existence of the negative daylight-saving effect in stock returns reported by Kamstra, Kramer, and Levi in 2000. Unfortunately, in their reply, Berument and Dogen ignored all of the points raised in the comment, failing even to cite the Kamstra, et al. comment. Berument and Dogen continued to use inappropriate estimation techniques, over-parameterized models, and low-power tests and perhaps most surprisingly even failed to replicate results they themselves reported in their previous paper, written by Berument, Dogen, and Onar in 2010. The findings reported by Berument and Dogen, as well as by Berument, Dogen, and Onar, are neither well-supported nor well-reasoned. We maintain our original objections to their analysis, highlight new serious empirical and theoretical problems, and emphasize that there remains statistically significant evidence of an economically large negative daylight-saving effect in U.S. stock returns. The issues raised in this rebuttal extend beyond the daylight-saving effect itself, touching on methodological points that arise more generally when deciding how to model financial returns data.
Ref: AA766

Does Mood Affect Trading Behavior?
Authors [Year]: Kaustia, Markku and Elias Henrikki Rantapuska [2012]
Journal [Citations]: SAFE Working Paper, 4 [6]
Abstract: We test whether investor mood affects trading with data on all stock market transactions in Finland, utilizing variation in daylight and local weather. We find some evidence that environmental mood variables (local weather, length of day, daylight saving and lunar phase) affect investors’ direction of trade and volume. The effect magnitudes are roughly comparable to those of classical seasonals, such as the Monday effect. The statistical significance of the mood variables is weak in many cases, however. Only very little of the day-to-day variation in trading is collectively explained by all mood variables and calendar effects, but lower frequency variation seems connected to holiday seasons.
Ref: AA449

A reexamination of the effect of daylight saving time changes on U.S. stock returns
Authors [Year]: Jayen B Patel [2012]
Journal [Citations]: Journal of the Academy of Business & Economics, 12(2), pp109-114
Abstract: We examine the effect of daylight saving time changes on U.S. stock returns for the period January 2001 to December 2010. Utilizing CRSP value-weighted and equally-weighted equity indices, our results indicate that daylight saving weekends are not significantly lower than that of other weekends. Furthermore, our significance results remained consistent when we separated our data by fall and spring daylight saving time changes for comparisons. We therefore conclude that the daylight saving time changes does not impact the U.S. stock market.
Ref: AA767

Effects of daylight saving time changes on stock market volatility: a reply
Authors [Year]: Hakan Berument and Nukhet Dogan [2011]
Journal [Citations]: Psychological Reports, 109, pp863-878 [2]
Abstract: There is a rich array of evidence that suggests that changes in sleeping patterns affect an individual’s decision-making processes. A nationwide sleeping-pattern change happens twice a year when the Daylight Saving Time (DST) change occurs. Kamstra, Kramer, and Levi argued in 2000 that a DST change lowers stock market returns. This study presents evidence that DST changes affect the relationship between stock market return and volatility. Empirical evidence suggests that the positive relationship between return and volatility becomes negative on the Mondays following DST changes.
Ref: AA765

The Daylight Saving Time Anomaly in Stock Returns: Fact or Fiction?
Authors [Year]: Gregory-Allen, Russell and Ben Jacobsen and Wessel Marquering [2010]
Journal [Citations]: Journal of Financial Research, 33(4), pp403–427 [4]
Abstract: Stock market returns in 22 markets around the world show no evidence of a daylight saving time effect. Returns on the days following a switch from or to daylight saving time do not behave any differently from stock market returns on any other day of the week or month. These results reject earlier conclusions in the literature—based on less data—that investors’ mood changes induced by changes in sleep patterns significantly affect stock returns.
Ref: AA236

Effects of daylight-saving time changes on stock market volatility: a comment
Authors [Year]: Mark J. Kamstra and Lisa A. Kramer and Maurice D. Levi [2010]
Journal [Citations]: Psychological Reports, 107, pp877-887
Abstract: In a recent article in this journal, Berument, Dogan, and Onar (2010) challenged the existence of the previously documented daylight-saving effect. Kamstra, Kramer, and Levi’s original finding (2000) was that average stock market returns on Mondays following time changes are economically and statistically significantly lower than typical Monday returns. Kamstra, et al. hypothesized that the effect may arise due to heightened anxiety or risk aversion on the part of market participants after they experience a 1-hr. disruption in their sleep habits, in accordance with prior findings in the psychology literature linking sleep desynchronosis with anxiety. Berument, et al. replicated the original findings using ordinary least squares estimation, but when they modeled the mean of returns using a method prone to producing biased estimates, they obtained puzzling results. The analysis here, based on standard, unbiased modeling techniques, shows that the daylight-saving effect remains intact in the U.S.
Ref: AA770

Daylight and investor sentiment: a second look at two stock market behavioral anomalies
Authors [Year]: Jeffrey R. Gerlach [2010]
Journal [Citations]: Journal of Financial Research, 33(4), pp429–462 [1]
Abstract: Kamstra, Kramer, and Levi (2000, 2003) describe two stock market behavioral anomalies associated with changes in investor sentiment caused by daylight saving time (DST) changes and seasonal affective disorder (SAD). According to the hypothesized effects, DST changes and SAD affect asset prices by changing investors’ risk aversion. Although changes in the timing or amount of daylight are correlated with unusual stock market returns, I present evidence they do not cause those unusual returns. Instead, seasonal patterns in market-related information during the sample period are the likely cause of the correlation between stock market returns and DST changes or SAD.
Ref: AA613

Effects of daylight savings time changes on stock market volatility
Authors [Year]: Berument, M. Hakanand Nukhet Dogan and Bahar Onar [2010]
Journal [Citations]: Psychological Reports, 106 [7]
Abstract: The presence of daylight savings time effects on stock returns and on stock volatility was investigated using an EGARCH specification to model the conditional variance. The evidence gathered from the major United States stock markets for the period between 1967 and 2007 did not support the existence of the daylight savings time effect on stock returns or on volatility. Returns on the first business day following daylight savings time changes were not lower nor was the volatility higher, as would be expected if there were an effect.
Ref: AA356

Daylight saving effect
Authors [Year]: Luisa Müller and Dirk Schiereck and Marc W. Simpson and Christian Voigt [2009]
Journal [Citations]: Journal of Multinational Financial Management, 19(2), pp127–138 [5]
Abstract: Kamstra et al. [Kamstra, M.J., Kramer, L.A., Levi, M.D., 2000. Losing sleep at the market: the daylight saving anomaly. The American Economic Review 90, 1005–1011] argue that the mean weekend return following the changes in daylight saving time is less than the mean weekend return throughout the rest of the year. Opposing studies, such as Pinegar [Pinegar, J.M., 2002. Losing sleep at the market: comment. The American Economic Review 92, 1251–1256), reason that the observed results depend upon methodology. We extend the ongoing discussions by providing further evidence for equity markets and bond markets in Germany and across Europe. We further demonstrate that the daylight saving effect does not serve as a potential rationale for the weekend effect.
Ref: AA764

Robust global mood influences in equity pricing ♠
Authors [Year]: Michael Dowling and Brian M. Lucey [2008]
Journal [Citations]: Journal of Multinational Financial Management, 18(2), pp145–164 [34]
Abstract: This paper investigates the relationship between seven mood-proxy variables and a global equity dataset using a variety of group tests. The mood-proxy variables are constructed from weather data (precipitation, temperature, wind, geomagnetic storms) and biorhythm data (seasonal affective disorder, daylight savings time changes, lunar phases). This study contributes a greater understanding of the relationship between mood and equity pricing through testing the strength of the relationship between groups of mood-proxy variables and both returns and variance. Using a large and globally diverse equity dataset, robust econometric testing approaches, and testing deseasonalised and regular weather variables, we conclude that seasonal affective disorder and low temperatures show the greatest relationship with equity pricing.
Ref: AA769

Do Daylight-Saving Time Adjustments Really Impact Stock Returns?
Authors [Year]: Douglas G. Steigerwald and Marc Conte [2007]
Journal [Citations]:
Abstract: We study the possible impact of daylight-saving time adjustment on stock returns. Previous work reveals that average returns tend to decline following an adjustment. As averages are sensitive to outliers, more recent work focused on the entire distribution of returns and found little impact following adjustments. Unfortunately, the general nature of the alternative hypothesis reduces the power of the distribution test to detect an effect of adjustments on the location of the distribution. We construct robust tests that are designed to have power to detect a time-adjustment effect onthe location of returns. We also develop a more novel test of exponential tilting that is designed to accommodate possible heterogeneity in the return distribution over time. When we apply these test to S&P 500 stock returns, we are unable to rigorously detect a time adjustment effect on stock returns.
Ref: AA771

Weather, Biorhythms and Stock Returns – Some Preliminary Irish Evidence ♠
Authors [Year]: Dowling, Michael and Brian M. Lucey [2005]
Journal [Citations]: International Review of Financial Analysis, 14(3), pp337–355 [46]
Abstract: We investigate whether there exists a relationship between eight proxy variables for investor mood (based on the weather, biorhythms, and beliefs) and daily Irish stock returns over the period 1988 to 2001. Our study is motivated by recent research which argues that people’s decisions are influenced by their feelings, especially when the decision involves risk and uncertainty (e.g. Loewenstein et al., 2001). We find that some of the variables proposed in the literature (rain and time changes around daylight savings) are minor but significant influences. We also find preliminary evidence for the relationship between mood proxy variables and equity returns being more pronounced in times of positive recent market performance. This finding is consistent with psychological research showing that people in a good mood (in this case, because of presumed gains in their investment portfolios) are more likely to allow irrelevant mood factors to influence their decision-making (e.g. Mackie and Worth, 1991).
Ref: AA264

Don’t lose sleep on it: a re-examination of the daylight savings time anomaly
Authors [Year]: Lamba, Reinhold P. and Richard A. Zuberb and John M. Gandar [2004]
Journal [Citations]: Applied Financial Economics, 14(6), pp443-446 [8]
Abstract: A recent study finds evidence of a new financial market anomaly linking daylight savings time changes with market returns – spring and fall daylight savings time weekends are typically followed by large negative returns – and that these returns are significantly lower than regular weekend average returns. The present study finds that neither the consistency nor the magnitude and statistical significance claimed for this anomaly survives serious scrutiny.
Ref: AA390

Losing sleep at the market: an empirical note on the daylight saving anomaly in Australia
Authors [Year]: Worthington, Andrew C. [2003]
Journal [Citations]: Economic Papers: A journal of applied economics and policy, 22(4), pp83-93 [7]
Abstract: The ‘daylight saving effect’ predicts that the mean weekend return following the spring and fall/autumn changes in daylight saving time is less than the mean weekend return throughout the rest of the year. With this market anomaly, the change in market participants’ behaviour is linked with sleep desynchronosis and the change in circadian rhythm and its negative impact on sleep patterns. This study investigates the purported daylight saving effect in Australian equity market returns over the period 1979/80-2002/03 using parametric testing and regression analysis. After adjustments are made for heteroskedasticity and autocorrelation in the data, neither the transition to nor the movement from daylight saving is associated with returns that differ from other days. The results also show the absence of any significant weekend effect in the Australian equity market.
Ref: AA357

Losing Sleep at the Market: The Daylight Saving Anomaly: Reply ♠
Authors [Year]: Mark J. Kamstra and Lisa A. Kramer and Maurice D. Levi [2002]
Journal [Citations]: The American Economic Review, 92(4), pp1257-1263
Abstract:
Ref: AA768

Losing Sleep at the Market: Comment
Authors [Year]: Pinegar, J. Michael [2002]
Journal [Citations]: The American Economic Review, 92(4), pp1251-1256 [43]
Abstract:
Ref: AA353

Losing Sleep at the Market: The Daylight-Savings Anomaly ♠
Authors [Year]: Kamstra, Mark J. and Kramer, Lisa A. and Levi, Maurice D. [2000]
Journal [Citations]: American Economic Review, 90, pp1005–1011 [221]
Abstract: We explore the connection between equity returns and sleep disruptions following daylight-savings time changes. In international markets, the average Friday-to-Monday return on daylight-savings weekends is markedly lower than expected, with a magnitude 200 to 500 percent larger than the average negative return for other weekends of the year. This “daylight-savings anomaly” in financial markets is consistent with desynchronosis research which has identified the effects of changes in sleep patterns on judgment, anxiety, reaction time, problem solving and accidents. This paper suggests sleep effects of daylight-savings time changes may be impacting market participants internationally.
Ref: AA134

INDEX (of papers listed below)

See also

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