Trick or treat? The Halloween effect in stock markets revisited

Abstract

PurposeThe subject of this paper is seasonal variation in the return on stocks. The phenomenon we analyze here is known as the “Halloween effect” or the trading strategy “sell in May and go away.” The authors test the hypothesis that stock markets tend to return considerably less in the six months beginning in May than in the other half of the year. This effect has shown persistency over time and is seemingly large enough to be a candidate for economic significance.Design/methodology/approachThe authors analyze monthly data from 13 countries for the period 1958–2019, using the Kruskal–Wallis test, t-test and a boot-strap based estimator. In addition, we look a sub-periods for a larger group of countries and include data on both stock returns and interest rates.FindingsThe authors find a strong seasonal effect in a large majority of the markets, with the period from November to April seeing higher returns than the other six months of the year. This result also holds for a larger sample of countries based on data from a shorter period. The effect is found to be economically significant in most countries in the sample. The authors examine one potential explanation for seasonal variation in stock returns, i.e. seasonal affective disorder (SAD). The authors find some, albeit weak, support for this hypothesis.Originality/valueThis paper uses a rich dataset that has not been used for this purpose before and robust tests of statistical and economic significance to shed light on an important aspect of global financial markets.

The Sell-in-May effect in ESG indices

“…Zhang and Jacobsen (2021) present evidence for a robust Halloween effect in their worldwide study, with returns during the winter months estimated as 4% higher than those from May to October. These results support those of Magnusson (2020), who evaluated monthly data for 13 countries from 1958 to 2019 and found a strong, economically significant seasonal effect for all but one of the countries studied. Two possible explanations suggested by Zhang and Jacobsen (2021) for the Halloween anomaly are the January effect and seasonal affective disorder, i.e., a heightened risk aversion caused by depression due to shorter days in the fall and winter months.…”

“…(2017), Arendas et al. (2018), Magnusson (2020), Plastun et al. (2020), and Zhang and Jacobsen (2021), a weak or non-existent effect has been found by Riepe (2003), Maberly and Pierce (2004), Lucey and Zhao (2008), Jones and Lundstrum (2009), and Fuller et al.…”

“…Bouman and Jacobsen's (2002) work, which shows the existence of the effect, is often used as the standard for comparison of results in later studies. Even though their results are later confirmed by Zarour (2007), Swagerman and Novakovic (2010), Witte (2010), Lean (2011), Andrade et al (2013), Vesela and Neubauerova (2016), Carrazedo et al (2016), Schabek and Castro (2017), Lloyd et al (2017), Arendas et al (2018), Magnusson (2020), Plastun et al (2020), and Zhang and Jacobsen (2021), a weak or non-existent effect has been found by Riepe (2003), Maberly and Pierce (2004), Lucey and Zhao (2008), Jones andLundstrum (2009), andFuller et al (2012), among others.…”