Forget "The January Effect", Fall Is The Season Of Volatility

Tyler Durden's picture

Goldman Sachs' Jose Ursua assesses puzzling seasonal patterns of volatility by month, day, and type of data period

There are a few “market anomalies” affecting the seasonality of stock returns that have captured some investor attention, like the day-of-the-week effect or the January effect, for example. They are called anomalies because – according to financial theory – the market should arbitrage away the regularity of such patterns. But in reality, it does not. We ask whether similar patterns exist with respect to market volatility. And the answer is yes: they exist and are equally puzzling.

Monthly patterns: Fall is the season of vol

We start by looking at average volatility (of S&P 500 daily returns) over the course of the year, split by month. If the arbitraging away argument were right, we would not expect to see major differences across months. Yet we find the opposite – volatility tends to be steady in the spring and summer, considerably higher in the fall, and relatively lower in the winter. Indeed, the averages for those periods since 1928 are as follows: March through August (14.8%), September through November (17.5%), and December through February (13.9%). For the whole year, average volatility stands at 15.2%, so in effect there are substantial intra-year “Vol Seasons,” which do not change much depending on which historical period we take.

The famous adage, “Sell in May and go away; don't come back till St Leger Day,” is based precisely on the notion that investors would go away for the summer, volumes would come down, and volatility would rise to uncomfortable levels. The St. Leger Stakes (an English horseracing classic) usually takes place in mid-September, so the pattern would be somewhat off when it comes to volatility – at least with respect to US markets. Our results show that a more proper recipe for volatility traders would be to “Buy in Independence Day and go away; don’t come back till Halloween” – or something like that.

Daily patterns: Not so smooth coming back from the weekend

We then look at average annualized volatility by day of the week. We find that volatility is highest at the beginning of the week, and then declines towards Friday. For the three historical periods, Monday through Friday volatility goes from: 19.4% to 17.4% (since 1928), 18.0% to 13.9% (since 1946), and 21.3% to 16.3% (since 1980) One could argue that some historical events that occurred at the beginning of the weak are to blame for these patterns – like Tuesday 9/11 2001, Black Monday of October 1987, and Black Tuesday of October 1929. But excluding them does not materially alter the patterns.

We also find that volatility is highest at the turn of the month, with two intra-month spikes: one around the 11th and another one around the 22nd-23rd. The bottom line appears to be that markets get relatively more nervous at the turn of the week and at the turn of the month. At least partially, these patterns could reflect some Monday blues on the one hand and portfolio-rebalancing sprees on the other.

Data patterns: Bad news makes markets nervous

Finally, we look at how volatility behaves around data surprises. We find that volatility is substantially higher around data misses (when our MAP indicator – which is higher, equal, or lower than zero when prints exceed, match, or undershoot consensus, respectively – is negative). Moreover, that spike happens almost exclusively in the midst of what we have called “Active” data periods of the month (running from Philly Fed to Non-farm Payrolls, the most intense period in terms of data releases). In contrast, “Lull” periods (when there are fewer data releases) show more boring patterns, regardless of the sign of MAP.

Keep “Vol Seasons” in mind, but trust fundamentals

For an infinitely-lived investor, exploiting market anomalies can be profitable. But for regular investors with shorter horizons, the strategy is somewhat riskier – since patterns tend to materialize, but do not always. In the end, “Vol Seasons” are something to keep in mind, but fundamental analysis should stay in the driver’s seat.

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syntaxterror's picture

The market will be plowing forward with new highs in Fall. The amount of free shit promised in the build up to the election will be astounding.

knukles's picture

Ah yea, the great misunderstood "fall" phenomenon.

One of the things that drove me over the brink with equity pukes was the this that and the other effects.
As if they had predictive power.
And they acted and still act as if the mass accumulation of aphorisms, smart and snarky sound bits of so called wisdom served as the basis for all accumulated knowledge and insights.
Really fucking annoying.

The Fall effect.

Sorta like Harry Reid saying that the "Republicans are Assholes."  Makes the rest of life so much more clear and easy.

The best effect I recollect is the Asshole Effect.
And for some obsure and probably misplaced reason I seem to always associate it with Goldman.
Huh... so odd, that.

TeamDepends's picture

"Fall" says all there's to say

And the banksters are not going away

Until, that is

Yellen fails the quiz:

How and why should WE pay?

max2205's picture

It's an election year...stay long

Every year is an election year


Carpenter1's picture

2008 was an election year.

q99x2's picture

Son of a bitch. Now we have to wait until Fall. WTF Fall this year no?

I've been waiting a good percentage of my life for this. Many have already passed away waiting. It better be Fall 2014 M'Fers.

Is Greece going to default?

dracos_ghost's picture

No way in hell any appreciable or sustained pullback until Summer 2016. Most 2 term presidents show similar behavior for end of 2nd term implosions.

Logical or not that the markets should've crashed horribly by now, sometimes 'you have to dance with who ya brung'. Pissing into the wind just gets you wet.

max2205's picture

Fall has been canceled this year

disabledvet's picture

risk is not an abstraction. Hurricane season starts in August and peaks in October. Incredibly we haven't had one in six years!

Hmmm. the odds of that are pretty slim.

interestingly we had a huge lawsuit against BP which has paid out tens of billions of dollars (hasn't done much to the stock price though) and appears to be the gift that keeps giving in "Business friendly Texas." This lawsuit halted all production out of the Gulf of Mexico for many, many, many years. But this just changed last year.

"That's a lot of production just in time for Hurricane season."

North Dakota is a real problem because it's so cold in the winter up there...besides incentivizing also have the "problem" of "not having to cool to super heated fuel coming out of the ground in winter." In short winter actually increases production of energy.

Once that flaring stops "bad weather will actually be a net positive for both profits and growth."

Interestingly coal prices have collapsed. How this doesn't accelerate default is beyond my ability to comprehend.

knukles's picture

The Messiah said that the reason we've had so many hurricanes this year is global warming.

Notsobadwlad's picture

I feel as if I am now readng The Street or Motley Fool.

When did ZH become such as waste of time?

moneybots's picture

"Keep “Vol Seasons” in mind, but trust fundamentals"


Fundamentals don't matter in a rigged market.  The S&P 500 hasn't tripled on fundamentals, it has tripled on massive financial fraud.