Calendar effect

Last updated

A calendar effect (or calendar anomaly) is any market anomaly, different behaviour of stock markets, or economic effect which appears to be related to the calendar, such as the day of the week, time of the month, time of the year, time within the U.S. presidential cycle, decade within the century, etc... [1]

Contents

Some people believe that if they do exist, it is possible to use market timing.

Seasonal patterns are not confined to prices; many other systems can exhibit the same kind of calendar effect. However, the term is most often used in an economic context.

Causes

Market prices are often subject to seasonal tendencies because the availability and demand for an item is not constant throughout the year. For example, natural gas prices often rise in the winter because that commodity is in demand as a heating fuel. In the summer, when the demand for heat is lower, prices typically fall.

Examples

Notable calendar effects include:

Arguments that calendar effects do not exist or are not significant

In their 2001 paper Dangers of data mining: The case of calendar effects in stock returns, Ryan Sullivan et al. argue that there is no statistically significant evidence for calendar effects in the stock market, and that all such patterns are the result of data dredging. [5] However there are contradictory findings and there is an ongoing debate on behavioral economics versus rational choice theory.

According to the efficient-market hypothesis, the calendar anomalies should not exist because the existence of these anomalies should be already incorporated in the prices of securities. [6]

Calendar anomalies are significantly influenced by the financial trend, because the investors' psychology depends on the business cycle, and their behavioral change influences not only the market's performance but also the calendar anomalies (Vasileiou (2015)). [7]

Moreover, some calendar anomalies seem to fade if we do not revise them. E.g. if examine the Turn of the Month effect using the dominant (-1,+3) definition as proposed by Lakonishok and Smidt(1988), this effect weakens, unless we revise the window period/definition (Vasileiou (2018)). [8]

Related Research Articles

An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles. Economic indicators include various indices, earnings reports, and economic summaries: for example, the unemployment rate, quits rate, housing starts, consumer price index, Inverted yield curve, consumer leverage ratio, industrial production, bankruptcies, gross domestic product, broadband internet penetration, retail sales, price index, and changes in credit conditions.

In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. As a type of active management, it stands in contradiction to much of modern portfolio theory. The efficacy of technical analysis is disputed by the efficient-market hypothesis, which states that stock market prices are essentially unpredictable, and research on whether technical analysis offers any benefit has produced mixed results. It is distinguished from fundamental analysis, which considers a company's financial statements, health, and the overall state of the market and economy.

<span class="mw-page-title-main">Price–earnings ratio</span> Financial Metric

The price–earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share (stock) price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.

<span class="mw-page-title-main">Veblen good</span> Luxury good for which the demand increases as the price increases

A Veblen good is a type of luxury good, named after American economist Thorstein Veblen, for which the demand increases as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve. The higher prices of Veblen goods may make them desirable as a status symbol in the practices of conspicuous consumption and conspicuous leisure. A product may be a Veblen good because it is a positional good, something few others can own.

The January effect is a hypothesis that there is a seasonal anomaly in the financial market where securities' prices increase in the month of January more than in any other month. This calendar effect would create an opportunity for investors to buy stocks for lower prices before January and sell them after their value increases. As with all calendar effects, if true, it would suggest that the market is not efficient, as market efficiency would suggest that this effect should disappear.

<span class="mw-page-title-main">Bollinger Bands</span> Statistical price volatility chart

Bollinger Bands are a type of statistical chart characterizing the prices and volatility over time of a financial instrument or commodity, using a formulaic method propounded by John Bollinger in the 1980s. Financial traders employ these charts as a methodical tool to inform trading decisions, control automated trading systems, or as a component of technical analysis. Bollinger Bands display a graphical band and volatility in one two-dimensional chart.

A market anomaly in a financial market is predictability that seems to be inconsistent with theories of asset prices. Standard theories include the capital asset pricing model and the Fama-French Three Factor Model, but a lack of agreement among academics about the proper theory leads many to refer to anomalies without a reference to a benchmark theory. Indeed, many academics simply refer to anomalies as "return predictors", avoiding the problem of defining a benchmark theory.

<span class="mw-page-title-main">Market sentiment</span> General attitude of investors to market price development

Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events. If investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. Market participants who maintain a static sentiment, regardless of market conditions, are described as permabulls and permabears respectively. Market sentiment is usually considered as a contrarian indicator: what most people expect is a good thing to bet against. Market sentiment is used because it is believed to be a good predictor of market moves, especially when it is more extreme. Very bearish sentiment is usually followed by the market going up more than normal, and vice versa. A bull market refers to a sustained period of either realized or expected price rises, whereas a bear market is used to describe when an index or stock has fallen 20% or more from a recent high for a sustained length of time.

Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.

In financial economics and accounting research, post–earnings-announcement drift or PEAD is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks following an earnings announcement.

An event study is a statistical method to assess the impact of an event.

Sell in May and go away is an investment strategy for stocks based on a theory that the period from November to April inclusive has significantly stronger stock market growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash ; stocks are bought again in the autumn, typically around Halloween. "Sell in May" can be characterised as the belief that it is better to avoid holding stock during the summer period.

There are several concepts of efficiency for a financial market. The most widely discussed is informational or price efficiency, which is a measure of how quickly and completely the price of a single asset reflects available information about the asset's value. Other concepts include functional/operational efficiency, which is inversely related to the costs that investors bear for making transactions, and allocative efficiency, which is a measure of how far a market channels funds from ultimate lenders to ultimate borrowers in such a way that the funds are used in the most productive manner.

Mean reversion is a financial term for the assumption that an asset's price will tend to converge to the average price over time.

In finance, momentum is the empirically observed tendency for rising asset prices or securities return to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month. Momentum signals have been used by financial analysts in their buy and sell recommendations.

See Business Cycle.

The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value. The calculation can be performed in two ways, but the result should be the same. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share. It is also known as the market-to-book ratio and the price-to-equity ratio, and its inverse is called the book-to-market ratio.

<span class="mw-page-title-main">Share price</span> Term in finance

A share price is the price of a single share of a number of saleable equity shares of a company. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.

<span class="mw-page-title-main">Low-volatility anomaly</span>

In investing and finance, the low-volatility anomaly is the observation that low-volatility stocks have higher returns than high-volatility stocks in most markets studied. This is an example of a stock market anomaly since it contradicts the central prediction of many financial theories that taking higher risk must be compensated with higher returns.

The Buffett indicator is a valuation multiple used to assess how expensive or cheap the aggregate stock market is at a given point in time. It was proposed as a metric by investor Warren Buffett in 2001, who called it "probably the best single measure of where valuations stand at any given moment", and its modern form compares the capitalization of the US Wilshire 5000 index to US GDP. It is widely followed by the financial media as a valuation measure for the US market in both its absolute, and de-trended forms.

References

  1. "September Is Just a Month". September 2, 2013.
  2. https://academic.oup.com/book/54648/chapter-abstract/422635057?redirectedFrom=fulltext
  3. https://seekingalpha.com/article/4636170-strange-patterns-in-intraweek-returns-part-1
  4. https://seekingalpha.com/article/4636175-strange-patterns-in-intraweek-returns-part-2
  5. Sullivan, Ryan; Timmermann, Allan; White, Halbert (November 2001), "Dangers of data mining: The case of calendar effects in stock returns", Journal of Econometrics , 105: 249–286, doi:10.1016/S0304-4076(01)00077-X
  6. Schwert, G. William (2003), "Chapter 15 Anomalies and market efficiency", Handbook of the Economics of Finance, Elsevier, pp. 939–974, ISBN   9780444513632
  7. Vasileiou, Evangelos (2015). "Long Live Day of the Week Patterns and the Financial Trends' Role. Evidence from the Greek Stock Market during the Euro Era (2002-12)". Investment Management and Financial Innovations. 12 (3). doi:10.2139/ssrn.2338430. ISSN   1556-5068. S2CID   154992237. SSRN   2338430.
  8. Vasileiou, Evangelos (2018). "Is the turn of the month effect an "abnormal normality"? Controversial findings, new patterns and…hidden signs(?)". Research in International Business and Finance. 44: 153–175. doi:10.1016/j.ribaf.2017.07.057. ISSN   0275-5319. S2CID   157633009.