Biological, psychological and medical evidence widely suggests that the lunar phases may affect human behavior and mood. This suggestion motivates this study of the relationship between lunar phases and stock returns. Relevant papers indicate that lunar cycle effects do have an effect on stock returns. They indicate that the mean daily stock returns are lower near the full moon and higher near the new moon days. This paper further investigates the association between the lunar phases and daily stock returns by using a two-regime autoregressive model with a GARCH(1,1) innovation. Rather than only examining the average daily returns, the discussion will be extended in three directions: the average daily returns, the correlation between consecutive daily returns, and the GARCH volatility. The Bayesian approach will be applied to the daily stock returns of 12 countries, including the G7 markets and five emerging markets in Asia. In general, the statistical results indicate the existence of lunar effects on daily stock returns, although different patterns are shown by the G7 markets and some of the discussed Asian markets. In particular, the autocorrelation for consecutive daily returns is significantly different, according to both the lunar phases and the diverse structures of the various stock markets. Furthermore, for some of the G7 markets, the volatility of the stock returns changes according to different lunar phases; higher volatility in the full moon period. In summary, the evidence is consistent and supports the popular belief that lunar phases do affect human financial behavior.

Historical literature reflects man's superstitions and myths, including the widespread belief that moon phases affect human behavior. People believe that abnormal human behavior peaks around the full moon period, increasing the intensity of psychotic disorders, violence and other deviant behavior; for example, homicides, emergency hospital admissions, and crisis incidents all increase at this time. Following this persistent pattern of beliefs, there exists a considerable body of literature in psychology and medicine, indicating that the lunar cycles do affect the individual's mood and activities. Lunar effects on the human body and mind are supported anecdotally, as well empirically through psychological and biological research. Numerous psychological studies suggest that mood significantly affects human judgment and behavior (Frijda, 1988; and Schwarz and Bless, 1991). Moreover, current literature on behavioral finance further asserts the effects of mood on investors' valuation patterns and on asset returns (Kamstra et al., 2000; Loewenstein, 2000; Mehra and Sah, 2000; Hirshleifer, 2001; Coval and Shumway, 2001; and Cao and Wei, 2002).

Specifically, Weiskott (1974), Tasso and Miller (1976), Lieber (1978), and Hicks-Caskey and Potter (1992) indicate that a disproportionately high number of criminal offences and behavioral disorders occur during the full moon phase. Some survey reports also suggest that generally medical respondents believe in the lunar phenomena (Rotton and Kelly, 1985a and 1985b; Danzl, 1987; Vance, 1995; Kelly et al., 1996). A recent study by Neal and Colledge (2000) reports an increase in general practice consultations during the full moon phase. Such evidence can be traced all the way from ancient Greece and Rome, through the Middle Ages, and up to the present. The moon and its cycles have also long been considered an important factor in many other prominent human activities. For example, religious ceremonies are often timed to match precise phases of the lunar month, and some calendars are still based on lunar cycles, including the Islamic, Hebrew, and Chinese calendars.

Behavioral Finance Journal, Bayesian Analysis, G7 Markets, Autoregressive Models, Biological Research, Behavioral Finance, Emerging Markets, Linear Regression Models, Simple Regression Models, Griddy Gibbs Method, Asian Markets, Future Trading Strategies, Stock Markets, Econometric Models.