Calendar anomalies are those deviations from the normal course of market, in which market gives abnormal returns. However, let me clarify in the starting of the article itself that these anomalies might not be effective pricing anomalies all the time. However, having knowledge of these anomalies can serve some purpose if you get chance to earn abnormal returns. The most common anomaly is January Effect, which is also know an Turn-of-the-month effect. It is also know as small firm in January effect because, it is most frequently observed in small cap stocks.
The reason for January Effect is that, in order to reduce tax liabilities, traders and investors sell their loser securities in December and create capital losses which they offset with the capital gain to reduce the tax liabilities. It was observed that these loser securities were generally small cap stocks, hence the name "Small Firm in January Effect"
Due to the excessive selling of shares in December, the stock prices are depressed, and than investors purchase it again in early part of January month at relatively attractive prices. This demand drives the stock prices up again, creating an abnormal return for the stocks.
Some of the Portfolio managers also do window dressing to their portfolio, there by creating January Effect. Portfolio managers have to prepare and report their portfolio holding as of 31st December. Portfolio managers sell riskier holdings before 31st December, just to make their portfolio appear less riskier on Annual Report, and later on purchase the riskier securities again in an expectation to earn higher returns.
Most common Calendar Based Anomalies and there interpretation are as follows:
The reason for January Effect is that, in order to reduce tax liabilities, traders and investors sell their loser securities in December and create capital losses which they offset with the capital gain to reduce the tax liabilities. It was observed that these loser securities were generally small cap stocks, hence the name "Small Firm in January Effect"
Due to the excessive selling of shares in December, the stock prices are depressed, and than investors purchase it again in early part of January month at relatively attractive prices. This demand drives the stock prices up again, creating an abnormal return for the stocks.
Some of the Portfolio managers also do window dressing to their portfolio, there by creating January Effect. Portfolio managers have to prepare and report their portfolio holding as of 31st December. Portfolio managers sell riskier holdings before 31st December, just to make their portfolio appear less riskier on Annual Report, and later on purchase the riskier securities again in an expectation to earn higher returns.
Most common Calendar Based Anomalies and there interpretation are as follows:
Turn-of-the-month Effect: It is observed that the returns tend to be higher on the last trading day of the month and the first three trading days of the next month.
Day-of-the-week Effect: Trading happens 5 days a week, if no holidays come in a week. This anomaly states that the average returns on Monday are lower or negative than other 4 week days, which are generally positive.
Weekend Effect: Returns on weekend tend to be lower than the returns on weekdays.
Holiday Effect: It is observed that the returns on stocks are higher on the day prior to market holiday than other days
My view is, if any of these anomalies could ever exist in market, than it will be soon eliminated by arbitragers. But keep an eye for these anomalies. Market always take you by surprise and who knows, when you get a chance to earn abnormal returns.
My view is, if any of these anomalies could ever exist in market, than it will be soon eliminated by arbitragers. But keep an eye for these anomalies. Market always take you by surprise and who knows, when you get a chance to earn abnormal returns.
About the Author
I am Prem, the founder of TheFinanceConcept. I am an Investment Advisor and a part-time blogger. I hold PG degree in MBA (Finance) and pursuing CFA. Blogging has become my passion from April 2011. I enjoy writing articles on Securities Analysis and Financial Planning.
Follow Us On Twitter or On Facebook
Follow Us On Twitter or On Facebook
Use the tab below to comment!!!
POST YOUR COMMENTS