Pre-Holiday Effect

Fundamental reason

Simple trading strategy

Out-of-sample strategy's implementation/validation in QuantConnect's framework(chart, statistics & code)

Source paper

Hansen, Lunde: Testing the significance of calendar effects

Abstract: This paper studies tests of calendar effects in equity returns. It is necessary to control for all possible calendar effects to avoid spurious results. The authors contribute to the calendar effects literature and its significance with a test for calendar-specific anomalies that conditions on the nuisance of possible calendar effects. Thus, their approach to test for calendar effects produces robust data-mining results. Unfortunately, attempts to control for a large number of possible calendar effects have the downside of diminishing the power of the test, making it more difficult to detect actual anomalies. The authors show that our test achieves good power properties because it exploits the correlation structure of (excess) returns specific to the calendar effect being studied. We implement the test with bootstrap methods and apply it to stock indices from Denmark, France, Germany, Hong Kong, Italy, Japan, Norway, Sweden, the United Kingdom, and the United States. Bootstrap p- values reveal that calendar effects are significant for returns in most of these equity markets, but end-of-the-year effects are predominant. It also appears that, beginning in the late 1980s, calendar effects have diminished except in small-cap stock indices.

Other papers

• Cao, Premachandra, Bhabra, Tang: Firm Size and the Pre-Holiday Effect in New Zealand

  Abstract: Using a sample spanning four decades, we document that the pre-holiday effect, one of the most common of the calendar effect anomalies, still exists in the New Zealand market. Contrary to international evidence, the effect appears to have increased over time. Moreover, we find that this effect is inversely related to firm size with the entire effect limited only to small firms, with no pre-holiday price patterns being observed for medium to large firms. The existence of this pre-holiday effect seems to be mainly driven by factors relevant to New Zealand. A search for possible reasons for the persistence of the effect points primarily towards the illiquidity of smaller stocks and the reluctance of small investors to buy prior to major market closures.

• Tornero, Meneu: Pre-Holiday Effect, Large Trades and Small Investor Behaviour

  Abstract: The purpose of this paper is to investigate the existence of a pre-holiday effect in the most important stocks of the Spanish Stock Exchange which are also traded in both the New York Stock Exchange and the Frankfurt Stock Exchange. Our results show high abnormal returns on the trading day prior to holidays. Several tests prove that the Spanish holiday effect is not due to market calendars in the USA or Germany. Also, we prove that the pre-holiday effect is not a manifestation of other calendar anomalies. The study of different liquidity measures suggests that the pre-holiday effect could be due to the reluctance of small investors to buy on pre-holidays, which produces an increase in the average size of bid orders. The results of this paper are of interest to the institutional investor since this anomaly could ave been exploited in some individual stocks.

• Tsiakas: THE ECONOMIC GAINS OF TRADING STOCKS AROUND HOLIDAYS

  Abstract: I assess the economic gains of strategies that account for the effect of holiday calendar effects on the daily returns and volatility of the 30 stocks in the DowJones Industrial Average index. The dynamic strategies use forecasts from stochastic volatility models that distinguish between regular trading days and different types of holidays. More important, I assess the economic value of conditioning on holiday effects and find that a risk-averse investor will pay a high performance fee to switch from a dynamic portfolio strategy that does not account for the effect of holidays on daily conditional expected returns and volatility to a strategy that does. This result is robust to reasonable transaction costs.

• Pardo, Lucey: Why Investors Should not be Cautious about the Academic Approach to Testing for Stock Market Anomalies

  Abstract: When evaluating the significance of calendar effects, such as those associated with Monday and January, it is necessary to control for all possible calendar effects to avoid spurious results. The downside of having to control for a large number of possible calendar effects is that it diminish the power and makes it harder to detect real anomalies.This paper contributes to the discussion of calendar effects and their significance. We derive a test for calendar specific anomalies, which controls for the full space of possible calendar effects. This test achieves good power properties by exploiting a particular correlation structure, and its main advantage is that it is capable of producing data-mining robust significance. We apply the test to stock indices from Denmark, France, Germany, Hong Kong, Italy, Japan, Norway, Sweden, UK, and USA. Our findings are that calendar effects are significant in most series, and it is primarily end-of-the-year effects that exhibit the largest anomalies. In recent years it seems that the calendar effects have diminished except in small cap stock indices.

• Marrett, Worthington: An empirical note on the holiday effect in the Australian stock market

  Abstract: This note examines the holiday effect in Australian daily stock returns at the market and industry levels and for small capitalisation stocks from Monday 9 September 1996 to Friday 10 November 2006. The eight annual holidays specified are New Years Day, Australia Day (26 January), Easter Friday and Easter Monday, ANZAC Day (25 April), the Queen’s Birthday (second Monday in June), Christmas Day and Boxing Day. A regression-based approach is employed. The results indicate that the Australian market overall provides evidence of a pre-holiday effect in common with small cap stocks. However, the market level effect appears to be solely the result of a strong pre-holiday effect in the retail industry. No evidence is found of a post-holiday effect in any market or industry.

• Alagidede: Month-of-the-year and pre-holiday seasonality in African stock markets

  Abstract: Seasonal anomalies (calendar effects) may be loosely referred to as the tendency for financial asset returns to display systematic patterns at certain times of the day, week, month or year. Two popular calendar effects are investigated for African stock returns: the month-of-the-year and the pre-holiday effects, and their implication for stock market efficiency. We extend the traditional approach of modelling anomalies using OLS regressions and, examine both the mean and conditional variance. We find high and significant returns in days preceding a public holiday for South Africa, but this finding is not applicable to the other stock markets in our sample. Our results also indicate that the month-of-the-year effect is prevalent in African stock returns. However, due to liquidity and round trip transactions cost the anomalies uncovered may not necessarily violate the no-arbitrage condition. Finally we discuss promising areas for future research using developing stock markets data.

• Bhana: Public holiday share price behaviour on the Johannesburg Stock Exchange

  Abstract: This investigaton evaluatesthe impact of the public holiday effect on the share returns of companies listed on the JSE during the period 1975-1990. On the trading day prior to holidays share advance with disproportionate freqency and show mean returns for the remainding days of the year. Over one-fifth of the total return acruing to the market portfolio over the 1975-1990 period was earned on the nine trading days which fall each year before holiday market closings. The empirical evidence suggests that the pre-holiday return may, in part, be due to the simultaneous movements from "bid" to the "ask" price. The holiday efect appears to be related to the human tendency to bid up share prices prior to market closings for weekdays and holidays.

• Carchano, Tornero: The Pan-European Holiday Effect

  Abstract: The construction of a single European block in the context of financial markets has caused the different national stock exchanges of the euro area to converge towards one common trading calendar that allows to study whether the holiday effect is a pan-European calendar anomaly or country-specific. By applying simulation methods, we provide evidence of the existence of statistically and economically abnormal positive pre- and post-holiday returns in the Eurozone which are not related to higher than average levels of volatility, but which can be explained by the preference of investors to avoid selling around European holidays.

• Hirschleifer, Jiang, Meng: Mood Beta and Seasonalities in Stock Returns

  Abstract: Existing research has documented cross-sectional seasonality of stock returns - the periodic outperformance of certain stocks relative to others during the same calendar month, weekday, or pre-holiday periods. A model based on the differential sensitivity of stocks to investor mood explains these effects and implies a new set of seasonal patterns. We find that relative performance across stocks during positive mood periods (e.g., January, Friday, the best-return month realized in the year, the best-return day realized in a week, pre-holiday) tends to persist in future periods with congruent mood (e.g., January, Friday, pre-holiday), and to reverse in periods with non-congruent mood (e.g., October, Monday, post-holiday). Stocks with higher mood betas estimated during seasonal windows of strong moods (e.g., January/October, Monday/Friday, or pre-holidays) earn higher expected returns during future positive mood seasons but lower expected returns during future negative mood seasons.

• Albertson, Nikolas L. and Tierney, Heather L.R. and Cline, Jeffrey W. and Boylan, Daniel Boylan: Abnormal Returns and Stock Performance Prior and after Federal Holidays

  Abstract: Using the De Bondt and Thaler’s abnormal returns model with data from the New York Stock Exchange from 2014 to 2018 and the Standard and Poor’s 500 Index, this paper finds that statistically significant positive abnormal returns are possible with respect to certain U.S. federal holidays, which are Martin Luther King Day, President’s Day, Christmas Day, and Memorial Day. The top two-thirds of the New York Stock Exchange based on market capitalization also provides an opportunity for earning positive abnormal returns. Further partitioning into the day before and day after a federal holiday yields positive abnormal returns with the best performance being provided by the day before a federal holiday subsample.

• Fleming, Grant Alan and Liu, Zhangxin (Frank) and Merrett, David and Ville, Simon: Are Investors Attentive Before a One-Off Holiday?

  Abstract: We examine trading patterns around regular and one-off public holidays on the Sydney Stock Exchange using a novel dataset covering a fifty-year period. We find that trading volume was significantly lower in the day before a regular public holiday and higher the day after a regular public holiday, supporting the investor inattention hypothesis. However, the holiday effect is not evident for one-off (irregular) holidays associated with royal visits, deaths or military events. We conclude that the holiday effect only applies for regular (annual) holidays known well in advance, providing a fresh perspective on how predictability influences investor activity.

• Vidal-García, Javier and Vidal, Marta: The Holiday Effect

  Abstract: This article studies the pre and post holiday effects, also known as holiday effect, for the most important stock markets around the world, through their main stock price indexes for a 34-year time frame from 1990 to 2024. Our results show that the pre-holiday effect exists for the Asian and North American markets. Particularly for Asia, returns for days prior to holidays are almost seven times higher than on regular days. We find post-holiday effects in Europe and North America. Returns for these days are accounted for as three times higher than a normal trading day. We do not find effects for the South African and South American markets. Additionally, we prove that the holiday effect is independent from other calendar anomalies, such as end-of-the-year or weekend effects.

• Mohamed, Hussein: Time-Based Trading Patterns

  Abstract: The research paper investigates the influence of various calendar anomalies on stock market returns across multiple indices, including the S&P 500, S&P 400, S&P 600, Russell 1,000 Growth, and Russell 1,000 Value. The study provides a comprehensive analysis of both individual and interaction effects of several well-known calendar anomalies, challenging the conventional understanding that these anomalies occur in isolation. The calendar effects studied include the Federal Open Market Committee (FOMC) meetings, Options Expiration Dates, the Holiday Effect, Sports Events Effect, Halloween Effect, Turn-of-the-Month Effect, January and September Effects, as well as Friday and Monday Effects. The research applies advanced regression techniques, incorporating an ARMA (1,1) model and an EGARCH (1,1) model with a t-distribution to account for both autocorrelation and volatility clustering in stock returns. The ARMA model, with exogenous variables representing the calendar anomalies and their interactions, captures the linear dependencies in return series. The EGARCH model further analyses the persistence and asymmetry in volatility, revealing how negative market shocks tend to increase volatility more than positive shocks. These models effectively highlight the impact of calendar anomalies on both the returns and volatility of the studied indices. The findings reveal that the Halloween Effect was the most significant anomaly observed, particularly impacting indices such as the S&P 500, S&P 400, S&P 600, and Russell 1,000 Value. These results suggest that this anomaly can be strategically leveraged by investors to optimize returns. While the research highlights the potential for using calendar anomalies as part of a time-based trading strategy, it also notes that the effects may vary across different indices, reflecting the unique characteristics of each market segment. The study contributes to the broader discourse on market efficiency by offering practical insights for investors and suggesting that these calendar-based anomalies may present exploitable opportunities within financial markets.