"Sell not only in May". Seasonal Effect on Emerging and Developed Markets

Tomasz Schabek 1Henrique Castro 2

1. University of Lodz, Katedra Ekonomii Przemyslu i Rynku Kapitalowego, ul. Rewolucji 1905 r., nr 41, Łódź 90-214, Poland
2. A Faculdade de Economia Administração e Contabilidade da Universidade de Sao Paulo FEAUSP (FEAUSP), Avenida Professor Luciano Gualberto, Sao Paulo 05508-010, Brazil

Described in Bauman and Jacobsen (2002) stock market anomaly still remains unexplained.  In long time series and wide geographical spread research “Halloween effect” is significant on 19 amongst 73 markets, but also in 11 amongst 23 with long time series data. Data shows that abnormal returns could be realized also in strategies staring in October, November and December. We conclude that even with control of weather (sun hours), behavioral (sentiment index, number of IPOs) and macroeconomic (industrial production) factors, the effect persists. Analyzing period starting just after publication of Bauman and Jacobsen (2002) the effect vanished almost on all markets – it could be proof of the market efficiency and exploitation of the strategy or just statistical phenomena caused by short period of data sample. “January effect” is detected in much less cases than “Halloween effect”.

Seasonal anomalies are widely discussed in financial literature because of their unknown nature and relative simplicity in application as market strategies. “Halloween effect” as one of them is subject of many articles. It was analyzed and tested on broad range of markets in Bauman and Jacobsen (2002). Briefly speaking we can describe it as anomaly that is driven from old market saying “Sell in May and go away”. Halloween indicator is another name to similar strategy that is to have long position from October 31 till April 30 each year - described in O'Higgins and Downes (1990). Although it has its beginnings only in market saying numerous of studies has proven that it is still profitable and valid investments strategy. In our paper we focus on finding possible explanation of the anomaly. We use set of the variables representing fundamental and behavioral factors that could influence market participant’s behavior. We verify hypothesis about the existence of similar effects for all strategies starting in winter and finishing in summer months. Weather factors has been broadly discussed as the possible reason of the anomaly, we address also this issue. Our research brings an important contribution to existing literature because we test Halloween effect in the context of behavioral variables. It allows to directly check if changes in investor sentiment are responsible for seasonal fluctuations. We used sentiment measure proposed by Baker and Wurgler (2007) which is solely based on market factors. We also analyzed the role of consumer confidence and industrial production. Secondly we directly test influence of daylight in seasonal-based-strategies to confirm or reject the hypothesis of its influence on Halloween effect. Thirdly we confirm the existence of similar seasonal effects not only in end of October – end of April period but also from end of September (November) till end of March (May).


In our study we divide used data into the following groups:

a)    Stock markets monthly rates of return.
b)    US market sentiment is measured by Baker and Wurgler (2007) monthly sentiment index and acquired directly from Wurgler web-page.
c)    Number of Initial Public Offering (IPO) is calculated based on data obtained from Reuters One database.
d)    Industrial production – gathered from World Bank Global Economic Monitor (GEM) database and OECD.
e)    Consumer Confidence Indicator – acquired from OECD database.
f)    Sun hours – data comes from World Meteorological Organization, Hong Kong Observatory and national meteorological institutes of analyzed countries.

We analyze 73 indexes that cover 68  countries and 2 non-country indexes (MSCI World and CRB commodity index). The selection of countries was driven by maximum possible geographical coverage and data availability.


First objective of this study is to check presence of “Sell in May and go away” (SiM) and Halloween (Hal) effects in a group of emerging and developed capital markets. For this purpose we used methodology similar to Bouman and Jacobsen (2002). Our second motive is to check hypothesis of significant role of daylight, U.S. market sentiment and number of IPOs, other sentiment index levels as possible causes of this effect. We also examine strategies starting in months other then May. Our tests imitate strategy that could be utilized by investors on stock market. This strategy is very similar to buy-and-hold except that it holds for six months of each year and during the rest of the year it takes form of passive “out of the market” strategy. We are examining if the starting month of the strategy plays any role and creates similar to SiM anomalies and if yes could it be explained by set of non-fundamental variables. This is the third motive of our study - to check if behavioral variables as postulated in Doeswijk (2008) are responsible for SiM / Hal - like effects.
After identification of seasonal effects we moved to examining possible explanations of them. For ten markets with longest available IPO history (US, UK, Japan, Canada, Australia, China, Hong Kong, India, South Korea and Taiwan) we can run time series regressions where number of IPOs on examined market, U.S. market sentiment, macroeconomic variable controlling for cyclical changes (industrial production) and dummy variables representing each month describe rates of return of those markets. In this approach we assume ad hoc that sentiment of U.S investors affects other markets because of large capital flows and primary role of American stock exchange. There is no stock market related  sentiment index data for other then US countries. In this case we also used the proxy of stock market sentiment for other markets - Consumer Confidence Indicator delivered by OECD. We could not conduct this analysis for all markets in our sample due to not enough IPO observation and lack of sentiment data, therefore we chose only ten mentioned above markets.  Purpose of this work is not to assess what behavioral or macroeconomic variables are describing stock market returns - we merely use them as control variables.Next step in exploring possible reasons of seasonal effects is to include in regressions sunlight variable. In this part we tested directly returns from described previously 6-month strategy. In cross sectional regressions we regressed average returns from those strategies.


The outcomes of our analysis generally support existence of not only Sell in May and Halloween effect but also seasonal effects in other months. We can observe that the estimated coefficients are mostly negative for strategies starting at the end of northern hemisphere spring months (Mar, Apr, May) and mostly positive for strategies beginning in last days of autumn months (Sep, Oct, Nov). Numbers of markets that can be characterized by SiM effect vary from 19 to 31 (11 to 21) when we use 0,10 (0,05) p-values for judging the significance of coeficients. Comparing to total number of analyzed indexes (73) those numbers seem to be small, but what is worth noticing out of 10 stock exchanges which total capitalization corresponds to over 70% of World Federation of Exchanges (WFE) global capitalization seven have significant SiM effect. One scratch on surface of hypothesis proving persistence of SiM effect is significantly lower number of SiM and Hal effects when we run our tests and start our sample just after Bouman and Jacobsen publication in 2002.


Financial market puzzle discovered by Bouman and Jacobsen in 2002 is still unsolved. Controlling for macroeconomic conditions (industrial production), behavioral variables (Consumer Confidence Index, number of IPOs and Baker–Wurgler sentiment Index) and weather factor (sun hours) did not cause disappearing of “Sell in May” or “Halloween” effects. We can conclude that answer for those anomalies should not be searched in Sun cycles, industrial production changes or investors sentiment as some authors suggest. Existence of persisting for longer time anomalies is calling for new research although after Bauman and Jacobsen publication the effect is fading – maybe because of exploitation of “Sell in May” and “Halloween” strategies or it is just short term disappearance of the anomaly. From the other hand more rigorous analysis shows that not only May but all spring/autumn months anomalies are present on many stock markets. We can conclude that old market saying is still able to deliver investors who want to listen it some positive rates of return.

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Presentation: Oral at Current Economic and Social Topics 2015, by Tomasz Schabek
See On-line Journal of Current Economic and Social Topics 2015

Submitted: 2015-12-13 15:22
Revised:   2015-12-13 18:31