Annual seasonality, also known as “Halloween Effect”. Swinkels and Vliet (2010) investigate 5 calendar effects and find that Halloween and ‘turn of the month’ (TOM) are the strongest effects (subsuming the other 3 effects studied):
The equity premium over the sample 1963-2008 is 7.2% if there is a Halloween or TOM effect, and -2.8% in all other cases.
TOM was studied in the last post.
For size and value segments:
During Halloween and/or TOM we find a large small cap premium of 12.40%, while for other calendar effects 2.48% premium remains. For value stocks these numbers are a staggering 14.93% and 0.69% respectively.
Investigating entry and exit day of the year in Amibroker from 1984 to 2014 yields the following:
Fama-French small-value portfolio:
Annual return peaks at 18% for entries on day 300 and exits on day 250. There is one trade per year (30 trades total).
For comparison, buy and hold return is 14%.
Sharpe Ratio is maximized at 1.9 for a later buy (day 350) and earlier sell (day 160). Annual return at peak Sharpe is reduced to 12%, excluding return on cash during half of the time.
Fama-French small momentum portfolio:
The shapes of the surface plots are similar. Results are compared in a table:
The momentum results exhibit a similar pattern to value but with 3% higher maximum returns.
Higher Sharpe strategies are also listed; Sharpe is 50% higher when selling 100 days earlier. Returns are reduced by 2% to 4% and exposure by 30%. Entry is held at day 300 as later entries limit gains, underlining the high average returns of November and December.
I also calculated the small momentum portfolio back to 1954 (60 trades) and found the same result: CAR 21%, buy day 300, sell day 260.
Finally, the portfolio is selected for each trade by 12 month momentum ranking. Again, similar results are produced (see table), showing that fund selection could be determined in real time.
Buy = DayOfYear() > Optimize(“buy day”,350,280,350,10);
Sell = DayOfYear() > Optimize(“sell day”,160,60,270,10) && 1–Buy;
PositionScore = ROC(C,252);
Next post: Factor seasonality