The turn-of-the-month anomaly is a well-known term in the financial world and has important implications for academics as well as for practitioners. For academics, the effect contradicts one of the founding principles of modern finance – that the market is weak-form efficient. On the other hand, it also presents a tradable pattern that investors can potentially take advantage of. Some research has linked the abnormal return to the pay-day effect. However, many companies pay their employees twice a month, on the 15th day and at the end of the month; therefore, it is natural that on the condition that the pay-day effect holds true for the turn-of-the-month days, there should be a recognizable pattern in the middle of the month as well. This paper confirms the aforementioned hypothesis since the results confirm that abnormal returns indeed exist in the middle of the month (the 16th day in the month is the 3rd best day in the month – if we are comparing the returns). The semi-monthly paychecks are distributed on the 15th of each month, and the retirement contribution portion should reach the financial institution at the end of the day, being ready for investing in the market on the following day, the 16th. Assuming that a significant portion of the retirement contribution funds is invested in broad-market funds, such as the S&P500 fund, strategy trades the S&P500 índex. Last but not least, the strategy that utilizes this pattern is really simple, and the only data that are needed are publicly available. Everything consists of simply holding the S&P500 index on the 16th day of the month.
The reason for the functionality is probably deeply connected with paychecks. Employees get paid at the end of the month, and many of them either automatically invest a portion of their paycheck in the market through retirement contributions or are encouraged to do so by having a surplus of funds with the new paycheck. However, many companies pay their employees twice a month, on the 15th and at the end of the month. Therefore, building on that the pay-day effect holds true for the turn-of-the-month days, there should be a clear pattern in the middle of the month as well as at the end of the month since employees do make retirement contributions with every paycheck. Results confirm that abnormal returns indeed exist in the middle of the month. According to the research, the 16th of the month is not only the 3rd best day in the month overall, but has moved up in the ranks monotonically every decade since the 1950s, until the most recent decade, the 2010s. Although more and more firms are paying wages on a bi-weekly basis, the highest average hourly earnings are distributed semi-monthly followed by monthly distribution, which favors this strategy, and therefore, this effect should not diminish. Another possible reason for the functionality is that, because the other pay-days have been extensively discussed in the literature, practitioners have been trying to take advantage of the anomaly and market efficiency has caught up, reducing the magnitude of the anomaly. Therefore, this novel anomaly has a strong performance if we compare it with the other days, and mainly, it is not traded-off, at least not yet.
CFDs, ETFs, futures
Confidence in anomaly's validity
Backtest period from source paper
Notes to Confidence in Anomaly's Validity
Period of Rebalancing
Notes to Indicative Performance
data from table 4, panel B, annualized mean return
Notes to Period of Rebalancing
Number of Traded Instruments
Notes to Estimated Volatility
data from table 4, panel B, volatility computed from the t-stat (3,07)
Notes to Number of Traded Instruments
Notes to Maximum drawdown
Notes to Complexity Evaluation
Simple trading strategy
The investment universe consists of the S&P500 index. Simply, buy and hold the index during the 16th day in the month during each month of the year.
Hedge for stocks during bear markets
No - The strategy is timing equity market but invests long-only into equity market factor (even that only for a short period of time); therefore, it is not suitable as a hedge/diversification during market/economic crises.
Ma, Aixin and Pratt, William Robert: Payday Anomaly
Abnormal returns have been found on days near the turn of the calendar months. Previous studies have linked the phenomenon to month-end paychecks, of which a sizable proportion goes into employees’ retirement accounts and is then automatically invested in the market. Since many institutions adopt a semi-monthly pay schedule, we test the hypothesis that the market should exhibit detectable mid-month abnormal movement. Our results indicate that the 16th day of the month statistically and economically outperforms all other calendar days except the 1st and 2nd. As more and more institutions transition into bi-weekly pay schedule, however, the mid-month payday anomaly becomes less prominent.
Strategy's implementation in QuantConnect's framework