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.
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.
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 simply broadened to include pre-holiday days for local holidays in other markets.
Hansen, Lunde: Testing the significance of calendar effects
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.
Cao, Premachandra, Bhabra, Tang: Firm Size and the Pre-Holiday Effect in New Zealand
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
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
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
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
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
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
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
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
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.