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Calendar Effects

The time of year affects human activities and moods, both through natural variations in the environment and through artificial customs and laws. Do such calendar effects systematically and significantly influence investor/trader attention and mood, and thereby equity prices? These blog entries relate to calendar effects in the stock market.

Persistently Effective Sector Selection Variables

What variables are persistently effective in picking equity sectors for tactical (monthly) trading? In their July 2010 paper entitled “Global Tactical Sector Allocation: A Quantitative Approach”, Ronald Doeswijk and Pim van Vliet investigate the effectiveness of seven variables for tactical trading of ten global equity sector indexes. They test effectiveness of these variables separately and in combination, and after their respective publication dates. The seven variables are: one-month return momentum, 12-1 return momentum (over the 11 months prior to the last month), earnings revision trend, long-term return (over the four years prior to the last year) reversion, aggregate dividend yield, Federal Reserve policy (expansive or contractive) and sell-in-May seasonal.  The ten sectors are energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunication services and utilities.  Testing consists of monthly construction of equally weighted long-short portfolios based on variable conditions. For the first five variables, portfolios are long (short) the top (bottom) three sectors. The Federal Reserve policy and sell-in-May seasonal variables indicate whether to be long or short cyclical versus defensive sectors. The authors calculate net profitability based on a constant 0.60% round-trip trading friction. Using monthly sector index total returns and values for non-return variables mostly over the period 1970 through 2008, they find that: Keep Reading

Three Centuries of Calendar Effects

How well do calendar-based anomalies, such as the January and Halloween/Sell-in-May effects, hold up for data extending back three centuries? Do any new anomalies emerge from such a data set? In their October 2010 paper entitled “Are Monthly Seasonals Real? A Three Century Perspective”, Ben Jacobsen and Cherry Zhang examine an extremely long record of UK stock returns for evidence of calendar anomalies. Using 317 years of monthly UK stock index returns and risk-free rate proxies spanning 1693 through 2009, they find that: Keep Reading

The Lure of Trading at the Open?

Do naive investors, lured by news they encounter while the stock market is closed, bid up the prices of attention-getting stocks at the open? In their June 2010 paper entitled “Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open”, Henk Berkman, Paul Koch, Laura Tuttle and Ying Zhang examine whether attention-based trading by individual equity investors reliably causes temporary mispricing at the market open. Using intraday bid and ask price data for the 3,000 largest U.S. stocks over the period 1996-2008 (13 years), along with contemporaneous measures of retail investor attention to individual stocks and overall market sentiment, they conclude that: Keep Reading

A Daily Stock Return Cycle

Do the aggregate trading stimulants/habits of large players create short-term stock return patterns? In their June 2010 paper entitled “Are You Trading Predictably?”, Steven Heston, Robert Korajczyk, Ronnie Sadka and Lewis Thorson continue an investigation of daily patterns in stock returns by extending the sample period described in “Intraday/Daily Stock Return Patterns”. Using intraday bid and ask prices for 4,494 U.S. stocks spanning the post-decimalization period of January 2001 through December 2009 to calculate returns over 13 half-hour intervals each day, they find that: Keep Reading

Weekend Effect for Individual Stock Options?

Does reluctance of traders to hold naked short positions in individual stock options over weekends induce a weekend effect for option prices? In the February 2010 revision of their paper entitled “The Weekend Effect in Equity Option Returns”, Christopher Jones and Joshua Shemesh employ a portfolio approach to investigate a weekend effect for put and call options on U.S. stocks. They compute portfolio excess returns as the equally weighted average of individual option contract returns based on bid-ask midpoints, in excess of a short-term yield. Using price data for a filtered set of U.S. equity options and for the underlying stocks over the period January 1996 to June 2007, they conclude that: Keep Reading

The Real Calendar Effects?

Is it possible that some widely acknowledged calendar effects emerge from data only because of overlap with a few “real” calendar effects? In their December 2009 paper entitled “An Anatomy of Calendar Effects”,  Stefan Grimbacher, Laurens Swinkels and Pim Van Vliet examine interactions among five calendar effects: Halloween, January, turn-of-the-month, weekend and holiday. Specifically, they employ tests that control for all five effects simultaneously to determine whether any dominate or disappear in isolation. Using daily returns for the U.S. stock market in excess of the 30-day Treasury bill yield over the period July 1963 through December 2008, they conclude that: Keep Reading

Do Not Trade at the Open?

A reader noted and asked: “I frequently read that one should not trade at the open, because the smart traders manipulate opening prices to scalp the naive. Does it really help to wait a half hour (or whatever) before trading?” Keep Reading

In Search of Super-anomalies

Is there a common factor explaining multiple widely accepted stock return anomalies? In the March 2010 version of their paper entitled “Do Five Asset Pricing Anomalies Share a Common Mispricing Factor?Multifaceted Empirical Analyses of Failure Risk Proxies, External Financing, and Stock Returns” , Joseph Ogden and Julie Fitzpatrick investigate the ability of a single factor, involving operating profit and external financing, to explain five stock return  anomalies: (1) the failure-risk anomaly; (2) earnings momentum; (3) the external financing (stock buybacks/secondary offerings) anomaly; (4) the accruals anomaly; and, (5) the book-to-market anomaly.  Using monthly stock return and firm fundamentals data for a broad sample of U.S. stocks to form 205 portfolios over the period 1974-2008 (60,301 firm-year observations), they find that: Keep Reading

Option Expiration Week Stock Return Drill-down

Are stock returns anomalous during option expiration weeks? In the March 2010 version of their paper entitled “Stock Returns during Option Expiration Weeks and the Option-Stock Volume Ratio”, Chris Stivers and Licheng Sun investigate the behavior of stock returns during option expiration weeks for both large individual stocks and various stock indexes, focusing on individual large-cap stocks with actively traded options during 1996-2008. They also examine a longer 1983-2008 period (commencing with the introduction of stock index options) and a 1948-1972 pre-option market period. Using weekly stock return/trading volume and option trading volume data as available over these periods, they conclude that: Keep Reading

Anomalies for Building Very Short-term Trades?

A reader asked: “I am interested in finding a strategy to day-trade around the opening of trading. I would prefer the first half hour but would not be opposed to looking at strategies holding until the close or even the next day. With the high-frequency traders becoming the new liquidity providers, day traders like me aren’t left with much of an edge. I think the first half hour may still hold some opportunity. Do you know of any first half hour plays that I might start to build from?” Keep Reading

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