Prediction Markets / Leighton Vaughan Williams / 08 September 2009 / Leave a comment

Every time that I have watched the Wimbledon final from a Sydney hotel room, Maria Sharapova has won. Every time I have watched the World Cup final in a downtown Boston bar, France have won. The problem with this sort of logic is, of course, easy to spot. I have only watched one Wimbledon final while down under and I've viewed only one World Cup final while across the pond.

Some dodgy patterns are a bit less easy to spot, however, one of the best known being the so-called 'Superbowl effect.' This effect, identified and published by Professors Krueger and Kennedy in the 'Journal of Finance' in 1990, ostensibly established a solid relationship between a team from the NFC (National Football Conference) winning America's 'Superbowl' and an improvement the following year in the US stock market. The pattern could be traced back to 1967. Unfortunately for Kennedy and Krueger and fellow pattern spotters, however, it soon came crashing down to earth, along with the Denver Broncos.

Now the 'Superbowl' effect, as it has come to be known, always did have a dodgy feel to it, if only because there didn't seem any rhyme or reason why it should work. Other so-called 'anomalies' are rather more difficult to dismiss, however, one of the most well-known of these being the 'Weather Effect', first highlighted by Professor E.M. Saunders in a famous article published in 1993 in the 'American Economic Review.' In that paper, he argued that there was a link between the weather and the performance of stocks on Wall Street - the better the weather, the better the stocks performed.

The question confronting anyone interested in turning a profit was whether this was a genuine relationship or another freak finding? Well, for once those of a sceptical disposition were chastened, courtesy of a follow-up study by David Hirshleifer and Tyler Shumway, released in 2001. In that study, entitled, 'Good Day Sunshine: Stock Returns and the Weather', they confirmed using a different data set that there was indeed a positive link between stock returns and good weather. The reason, they argued, was a feel-good factor influencing investor sentiment. Interestingly, a Yale University working paper published the following year found that the market-makers played a big part in this, widening the spreads in the financial markets on cloudy days. In other words, the link between good weather and stock returns could, they argued, be traced in significant part to the behaviour of market-makers.

As John Lennon and Paul McCartney once put it, "I need to laugh, and when the sun is out, I've got something I can laugh about. I feel good in a special way: I'm in love and it's a sunny day. Good Day Sunshine, Good Day Sunshine, Good Day Sunshine."

Ah well, if only the duo had applied their idea to the stock market! I guess they could have beaten Professor Saunders to it. And who knows? They might even have become rich and famous.