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.