Do Calendar Anomalies Still Work? Evidence and Strategies

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Calendar anomalies in the stock market refer to recurring patterns or anomalies that occur at specific times of the year, month, or week, which cannot be explained by traditional financial theories. These anomalies often defy the efficient market hypothesis and provide opportunities for investors to exploit market inefficiencies. In this issue, I will feature some calendar anomalies and discuss whether they work in the current market or not. Codes and replication results are also provided.

In this issue

• Latest Posts

• Do Calendar Anomalies Still Exist?

  • Findings

  • Replication

• How End-of-Month Returns Predict the Next Month’s …

  • Findings

• Closing Thoughts

• Educational Podcast

  • Quant Radio: Calendar Anomalies in Trading

• Volatility Weekly Recap

• Around the Quantosphere

Latest Posts

• Catastrophe Bonds: Modeling Rare Events and Pricing Risk (10 min)

• Breaking Down Volatility: Diffusive vs. Jump Components (10 min)

• Crypto Market Arbitrage: Profitability and Risk Management (10 min)

• Optimizing Portfolios: Simple vs. Sophisticated Allocation Strategies (10 min)

• Capturing Volatility Risk Premium Using Butterfly Option Strategies (9 min)

Do Calendar Anomalies Still Exist?

Calendar anomalies were discovered long ago. Reference [1] examines whether they still persist in the present-day stock market. Specifically, the author investigates the turn-of-the-month (TOM), turn-of-the-quarter (TOQ), and turn-of-the-year (TOY) effects in the US stock market.

Findings

• The paper identifies the presence of the turn-of-the-month (TOM), turn-of-the-quarter (TOQ), and turn-of-the-year (TOY) effects in the US stock market, with the TOY effect being the most prominent.

• The analysis uses panel regression models on four-day return windows for individual stocks listed on the NYSE, AMEX, and NASDAQ from 1986 to 2021.

• The TOM, TOQ, and TOY effects are found to be present, and their strength varies based on firm characteristics.

• The TOY effect primarily affects small stocks with volatile prices, indicating that individual investors may sell their losses for tax purposes before the year-end.

• Stocks with low momentum are more susceptible to the TOY effect, suggesting that institutional investors may engage in performance hedging by selling underperforming stocks.

• The calendar effects have evolved over time, with the TOM and TOY effects resurfacing in recent decades, while the TOQ effect has diminished, potentially due to increased disclosure regulations.

• Companies with low Google search volumes are significantly more impacted by all three effects, indicating a relationship between information accessibility and the magnitude of calendar anomalies.

• A trading strategy is developed to identify stocks with the highest expected returns over TOM and TOY windows. The return exceeds realistic trading costs, indicating that calendar effects can be used to construct profitable trading strategies.

In summary, calendar anomalies continue to exist in the US stock market. Furthermore, they can be exploited to gain abnormal returns. For instance, every four-day TOY window yields an average profit of 1.66% when holding all stocks exclusively over the TOY windows. Similarly, an average profit of 0.55% is generated every four-day TOM window by exclusively holding all stocks over the TOM windows.

Replication

Vahid Asghari and his team at Academic Quant Lab have replicated the strategy presented in this paper. The results and codes can be found here.

Reference

[1] Idunn Myrvang Hatlemark and Maria Grohshennig, Calendar Effects in the US Stock Market: Are they still present?, 2022, Norwegian University of Science and Technology

How End-of-Month Returns Predict the Next Month’s Performance

Reference [2] introduced a novel calendar anomaly known as the end-of-month reversal effect. The study showed that end-of-month returns, i.e. returns from the fourth Friday to the last trading day of the month, are negatively correlated with returns in the following month.

Findings

• This paper identifies a novel 1-month aggregate market reversal pattern, which is driven by the previous end-of-month market return.

• It demonstrates that end-of-the-month returns of the S&P 500 are negatively correlated with returns one month later.

• The reversal effect is statistically significant both In-Sample and Out-of-Sample, confirming its robustness.

• Unlike traditional cross-sectional reversals, this pattern is stronger in high-priced and liquid stocks and follows an economic cycle.

• A simple rule-based trading strategy and more sophisticated models leveraging this pattern generate significant economic gains. The strategy is cyclical in nature and does not rely on short-selling.

• The reversal effect strengthens over the following month, aligning with pension fund inflows and reinforcing the payment cycle explanation.

In short, a simple trading strategy based on this effect, that is buying if the end-of-month return is negative and selling if it is positive, outperforms the buy-and-hold strategy over a 45-year period.

The author also provides an explanation for this anomaly, attributing it to pension funds’ liquidity trading, as they adjust their portfolios to meet pension payment obligations.

Reference

[2] Graziani, Giuliano, Time Series Reversal: An End-of-the-Month Perspective, 2024, SSRN

Closing Thoughts

In this issue, I discussed several calendar anomalies. Some of these patterns were discovered long ago and have proven to be persistent in today’s market. One of them represents a newly identified anomaly with promising characteristics. In all cases, profitable trading strategies were developed to take advantage of these recurring effects, highlighting the continued relevance of calendar-based insights in quantitative investing.

Educational Podcast

Quant Radio: Calendar Anomalies in Trading

Learn about Quantpedia’s “Composite Seasonal Calendar Strategy,” which combines several well-documented calendar anomalies to improve returns. From the turn-of-the-month effect to the FOMC meeting drift, this approach shows how individual seasonal patterns can be layered to build a more robust trading strategy. The combined strategy offers the potential for higher returns with controlled risk.

Volatility Weekly Recap

The figure below shows the term structures for the VIX futures (in colour) and the spot VIX (in grey).

Like last week, we will not provide a news update this week. Instead, we leave you with a graph of the spot and VIX futures over the past week. The market remains volatile, but the term structures are less in backwardation. Spot volatilities remain well above futures volatilities.

Around the Quantosphere

• Man Group Hedge Funds Losing Up To 15% This Year Show Quant Pain (Bloomberg)

• $800 billion ‘murder mystery.’ Here’s why the basis trade could be a time bomb—and what the Fed can do to stop it (fortune)

• Quants Winning Against Hedge-Fund Peers Get Slammed by Selloff (bloomberg)

• Experienced traders offer advice to exhausted juniors: "Burnout? It's been four days!" (efinancialcareers)

• The New Normal: How Volatility Became a Permanent Feature of Global Markets (xtb)

• Funds of hedge funds in decline (moneymarketing)

Disclaimer

This newsletter is not investment advice. It is provided solely for entertainment and educational purposes. Always consult a financial professional before making any investment decisions.

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