Behavioral Finance

CHAPTER 17

Calendar Effects

Do markets behave differently on different days of the week? Do returns differ in the beginning of the year as compared to the end of the year? Is the beginning of a trading day different than the end of the trading day? These are questions that involve whether the calendar itself has an impact on stock returns. Absent a compelling explanation, seasonal- or calendar-based return patterns would seem to violate the efficient market hypothesis (EMH), since it would suggest investment strategies that could benefit from past data.

Like many aspects of behavioral finance, calendar effects arose from Wall Street lore and the casual observations of traders. “Blue Monday” suggested that returns might be lower on Mondays, which is what traders seemed to think. As the weekend approached, traders got happier and returns were better at the end of the week, according to them. Is any of this true? And, if so, are simple explanations like expectations of the coming weekend really enough to move markets?

The most famous of all calendar effects is the “January effect,” discussed in Chapter 15. January seems to be different. Stock returns are higher in January than in the rest of the year. Another January effect also exists. If January returns are above normal, then the stock returns for the rest of the year seem to be above normal. Major research conclusions from such landmark works as Fama-French, De Bondt-Thaler, and Jegadeesh-Titman all find that something strange ...