The Pre-Holiday Effect is a calendar anomaly in equities – it is the tendency for a stock market to gain on the final trading day before a holiday. Research shows that market return during pre-holiday days is often more than ten times larger than the average return during normal trading days. It seems that a substantial part of the equity premium is concentrated in these several days.

This anomaly has been documented in many countries, so its validity seems really strong. Pre-holiday days on the market are often characterized by lower liquidity as a lot of market participants are not involved in the market, or they lower their exposure. A higher probability of positive market movement is consequently only a natural tendency as people are psychologically more optimistic. Therefore a very simple strategy could be constructed to exploit this market in-efficiency.

Fundamental reason

The main explanatory factors for this anomaly are behavioral. One explanation states that short-sellers close their risky positions prior to holidays. Another reason could be investors’ good mood around holidays, indicating greater optimism about future prospects and, therefore, a high probability of positive market moves.

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Markets Traded
equities

Financial instruments
CFDs, ETFs, funds, futures

Confidence in anomaly's validity
Strong

Backtest period from source paper
1896-2002

Notes to Confidence in Anomaly's Validity

Indicative Performance
6.39%

Period of Rebalancing
Daily

Notes to Indicative Performance

calculated from daily return (0.239%) in table 12 do DJ Index, multiplied by 10 (average number of holidays) plus estimated return on cash (4% p.a.)


Notes to Period of Rebalancing

Estimated Volatility
0%

Number of Traded Instruments
1

Notes to Estimated Volatility

not stated


Notes to Number of Traded Instruments

Maximum Drawdown
0%

Complexity Evaluation
Simple strategy

Notes to Maximum drawdown

not stated


Notes to Complexity Evaluation

Sharpe Ratio
0

Simple trading strategy

Investors use some simple investment vehicles to gain exposure to US equity market (ETF, fund, CFD or future) only during days preceding holiday days (New Year’s Day, Martin Luther King Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Election Day, Thanksgiving Day, Christmas Day). Investors stay in cash during other trading days. The anomaly isn’t limited only to the US market but seems to work well also in other countries; therefore, it could be broadened to include pre-holiday days for local holidays in other markets.

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 is not suitable as a hedge/diversification during market/economic crises.

Source paper
Strategy's implementation in QuantConnect's framework (chart+statistics+code)
Other papers

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