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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.

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

Norman Fosback’s Performance?

A reader asked: “Do you have any data and/or analysis of Norman G. Fosback’s performance?” Keep Reading

Abnormal Returns After Switches to/from Daylight Saving Time?

Do sleep disruptions from switches between standard time and daylight saving time reliably affect the return on the next trading day? In their September 2009 paper entitled “The Daylight Saving Time Anomaly in Stock Returns: Fact or Fiction?”, Russell Gregory-Allen, Ben Jacobsen and Wessel Marquering revisit this question based on a much larger sample than used in prior studies. Using daily returns of stock market indexes around switches to/from daylight saving time for 22 countries around the world spanning 1966-2005 (1,150 switches, tilted toward later decades), they conclude that: Keep Reading

How Rigorous is the Stock Trader’s Almanac?

A reader asked: “I am curious how reliable some of the factors referenced in the Stock Trader’s Almanac are, but I see no reference to it on your site. Could you review the book and/or the primary strategies in the book? I would be curious to have your perspective on how rigorous its analysis is.” Keep Reading

Abnormal Returns from Providing Liquidity After Hours?

Can traders reliably turn a profit by providing liquidity to anxious after-hours counterparts and then closing the trade at the open? In his September 2009 paper entitled “The Cost of Illiquidity: Evidence from After-Hours Trading”, Brian Walkup quantifies price reversal/momentum when the market opens for stocks experiencing price movements during preceding after-hours trading. Using a large sample of after-hours trades from the three major U.S. stock exchanges during 2006, he concludes that: Keep Reading

Optimally Exploiting the January Barometer

The January Barometer (as goes January, so goes the rest of the year) seems persistent for U.S. stocks. Is there a best way to exploit it? In their July 2009 paper entitled “What’s the Best Way to Trade Using the January Barometer?”, Michael Cooper, John McConnell and Alexei Ovtchinnikov update their prior analysis of the January Barometer through 2008 and explore how an investor can best exploit its signal. Specifically, they consider five alternative strategies (all ignoring trading costs and taxes): (1) long stocks all the time; (2) long stocks in all Januaries and long (short) stocks during February-December when the return for January is positive (negative); (3) long stocks in all Januaries and long stocks (Treasury bills) during February-December when the return for January is positive (negative); (4) long Treasury bills all the time; and, (5) long stocks in all Januarys and long Treasury bills the rest of all years. Using monthly U.S. stock returns and one-month Treasury bill (or equivalent) yields over the period 1857-2008 (152 years), they conclude that: Keep Reading

An Annual Worldwide Optimism Cycle (Sell in May)?

Does the conventional wisdom to “sell in May,” with the average stock return during November-April far exceeding that for May-October, work for the world equity market? If so, why? In the November 2005 version of his paper entitled “The Optimism Cycle: Sell in May”, flagged by a reader, Ronald Doeswijk examines the hypothesis that this seasonal pattern derives from an annual optimism cycle. Using monthly return data for markets, sectors and Initial Public Offerings (IPO) over the period 1970 through 2003 (34 years), he concludes that: Keep Reading

Turn-of-the-Month, Options Expiration and Trend

We previously found that Russell 2000 Index returns have tended to be negative during the interval from options expiration (OE) to the turn of the month (TOTM), strongly positive during TOTM and near zero from TOTM to OE. Might the index trend leading up to these segments, defined by the index being over or under a simple moving average (SMA), discriminate the strength of monthly segment effects? Are the results robust? Using daily opening and closing levels of the Russell 2000 index over the period September 1987 through April 2009 (259 complete months), we find that: Keep Reading

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