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One Of The Most Striking Equity Market Anomalies Explained
It is surprising how little attention academic literature has devoted to understand equity market returns around the turn of the month, despite the observations of Lakonishok and Smidt (1988) and McConnell and Xu (2008) among others that most of the returns accrue during a four-day period, from the last trading day to the third trading day of the month.
We find that the market returns are abnormally high also on the three days before the turn of the month.
In fact, combining the two observations, we find that since 1926, one could have held the S&P 500 index for only seven business days a month and pocketed almost the entire market return with forty percent lower volatility compared to a buy and hold strategy.
Since 1987, all of the positive equity returns have accrued during these seven trading days, and the average returns during the rest of the month have been negative. Odgen (1990) relates the high returns at the beginning of the month to the monthly payment cycle – the fact that large part of investors’ cash receipts are obtained on the last or the first business day of the month. Our findings lend additional support to this hypothesis.
In "Dash for Cash: Month-End Liquidity Needs and the Predictability of Stock Returns" -working paper we explore the turn of the month phenomenon further and discover new, previously unidentified patterns in equity returns.
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Frontrunning. Nothing more, nothing less.
More likely window dressing at end of month, and fund flows as stated in the article. This effect, if real, is not well known.
In any case this is fun for option traders. Thanks, Tylers.
What about POMO days?
Buying at 3:30 and selling the open the next day from 2013 to today would beat a buy and hold from 1900 to today
Thanks Ben!
BUY & HOLD.. remember tho
US Journalists Warned: Dress Smart If You Want To Cover Royal Visit http://hedgeaccordingly.com/2014/11/us-journalists-warned-dress-smart-if...Sooooo easy, a caveman can do it....
I read the post 99 times and I still don't know what 3 or 4 or 7 day period I should have been trading in......guess that's why I hold Gold
That is a little buggy. I read it as the last four trading days of the month + the first three trading days of the new month, so excluding weekends and holidays, you're talking about 1/4 of the time the market is open for trading. Not quite as dramatic as it first sounds, but worth more analysis.
More like 1/3 - 7 days out of about 21 business days per month.
But I need to go back and read - do you sell on t-3 and buy on t+3 or vice-versa?
Looks like vice-versa: buy when they are unloading at end of month, sell when they are reloading at start of month.
FWIW they blame this on mutual funds with their legal requirements, not some magic property of markets and calendars in general.
>Odgen (1990) relates the high returns at the beginning of the month to the monthly payment cycle – the fact that large part of investors’ cash receipts are obtained on the last or the first business day of the month.
So small investors are the driving force behind stock market rallies?!
Only indirectly. Mostly monthly deductions for pension plans and other automatic savings systems.
Easy to explain: Winston Smith only works at the end of the month.
An American, not US subject.
One reason for the wash trade rules.
They got an ETF for this?
But the costs of the churn will kill you!
The house always wins.
OK I'LL TRY IT THIS MONTH. ALL IN
"most of the returns accrue during a four-day period, from the last trading day to the third trading day of the month.
We find that the market returns are abnormally high also on the three days before the turn of the month."
"...these seven days..."
Dear Lauri,
3 days b4 turn + first 3 days = 6 days, not 7. Yes?