Losing sleep at the market: an empirical note on the daylight saving anomaly in Australia

Economic Papers (Economic Society of Australia), Dec, 2003 by Andrew C. Worthington

This article was originally printed in the September issue and is reproduced here in full. The original version of the article contained several errors, which were introduced at the printing stage and were in no way the fault of the author.

I Overview

In a recent provocative article, Kamstra et al. (2000) found that the average Friday-to-Monday stock return on daylight saving weekends was 200 to 500 percent larger than the average negative return for other weekends (the so-called 'weekend-effect' market anomaly) and thereby associated with a one-day loss of US$31 billion on the NYSE, AMEX and NASDAQ markets alone. Kamstra's et al. (2000) findings appeared to hold not only in the United States and Canada, where the transition to and from daylight saving is broadly similar, but also in the United Kingdom, whose patterns differ from that in North America, and to a lesser extent in Germany. On this basis, Kamstra et al. (2000, p. 1010) suggested that if daylight saving was associated with "... the sort of impact investigated here, an obvious policy implication is to do away with the time change altogether".

The essence of Kamstra's et al. (2000) argument is that the 'daylight saving effect' is linked with sleep desynchronosis associated with the change in the circadian rhythm and its (negative) impact on sleep patterns. Every Spring at 2:00 a.m. on the first Sunday in April US clocks are moved forward one hour, and the following Fall at 2:00 a.m. on the last Sunday in October clocks are moved back one hour. As with jet lag, where changes in sleep patterns are thought to persist up to five days for each one-hour time zone crossed (Waterhouse et al. 1997), the movement to daylight saving time (DST) also compresses the day, while the movement from daylight saving stretches it, and this also impacts upon sleep patterns.

If, and as hypothesised by Kamstra et al. (2000, p. 1006), "... sleep desynchronosis causes market participants to suffer greater anxiety about a given situation, ceteris paribus, they may prefer safer investments and shun risk in trades during the trading day following such a disturbance in their sleep patterns ... this could push down stock prices following daylight saving shifts when the desynchronosis is systematic". In fact, the argument that shifts to and from daylight saving has an impact upon actual behaviour already has parallels elsewhere with Bick and Hannah (1986) and Shapiro et al. (1990) studying the impact of DST on psychiatric presentation, and Coren (1996a, 1996b) Lambe and Cummings (2000), Varughese and Allen (2001) and Sullivan and Flannagan (2002) examining its role in traffic and pedestrian accidents.

All the same, there are a number of complications associated with Kamstra's et al. (2000) purported daylight saving effect, which may not arise in non-financial market contexts. To start with, the daylight saving effects exists in parallel with the oft-examined weekend effect, for which a number of competing hypotheses have already been put forward and tested (see, for instance, Agrawal and Ikenberry 1994, Chang et al. 1993, 1998 and Wang and Erickson, 997). These include lags in payment and cheque clearing settlements, midweek time pressures on individuals, the tendency for financial advice to be given after Monday strategy-setting meetings, and the larger percentageof purchases (sales) on Fridays (Mondays) at dealer ask (bid) prices (Kamstra et al. 2000). It may then be possible that the sleep desynchronosis associated with daylight saving weekends is just an alternative manifestation of this more usual market anomaly. For example, Pinegar (2002, p. 1256) countered that "the change in sleeping patterns from weekdays to weekends occurs with much greater frequency and is very plausibly more pronounced than the change in sleeping patterns between daylight-saving and non-daylight saving weekend. Thus sleep desynchronosis may contribute to the so-called 'day-of-the-week' effect on non-daylight saving Mondays also".

Another problem is that daylight saving transition weekends are by nature limited in number, and these may be juxtaposed with outliers. Once again, Pinegar (2002) questioned Kamstra's et al. (2000) conclusions on the basis that in the last eighty years three of the largest percentage declines in the S&P 500 took place after a fall daylight-saving time change (most recently Monday 26 October 1987). In response, Kamstra et al. (2002, p. 1263) countered, "... while we do not believe that daylight-saving-time changes cause market crashes, we do believe that daylight-saving-time changes affect the degree of market fluctuations ... we speculate that severe downturns are more likely following daylight-saving weekends, and we argue that the data support this contention" (original emphasis). Lastly, Pinegar (2000) also argues that the apparent corroboration offered by Kamstra's et al. (2000) inclusion of Canada, Germany and the United Kingdom in their analysis may be an illusion associated with the normal influence on them by the US market, and that such international evidence should then be treated more cautiously.