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

Backtest period from source paper
1896-2002

Confidence in anomaly's validity
Strong

Indicative Performance
6.39%

Notes to Confidence in Anomaly's Validity

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.)


Period of Rebalancing
Daily

Estimated Volatility

Notes to Period of Rebalancing

Notes to Estimated Volatility

not stated


Number of Traded Instruments
1

Maximum Drawdown

Notes to Number of Traded Instruments

Notes to Maximum drawdown

not stated


Complexity Evaluation
Simple strategy

Sharpe Ratio

Notes to Complexity Evaluation

Region
United States

Financial instruments
CFDs, ETFs, funds, futures

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
Out-of-sample strategy's implementation/validation in QuantConnect's framework (chart+statistics+code)
Other papers

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