Can Investors Benefit From a Stock Market X-Mas Effect?

Does the psychology of Christmas present investment opportunities?

Posted Dec 21, 2017

Investors have long wondered about a so-called ‘holiday effect’ on stock markets all around the world – but does this mean you can trade on a ‘Christmas Effect’, and if it does exist – what is it based on?

In a recent investigation entitled, ‘The efficient market hypothesis and calendar anomalies: a literature review’, Matteo Rossi from the University of Sannio in Italy, defined so-called ‘holiday effects’ as what happens in the markets just before a predictable stock exchange closure, because of a public holiday.

It turns out this seems to reliably affect the performance of daily stock returns. The study published in the academic journal, ‘International Journal of Managerial and Financial Accounting’ points out that on pre-holiday trading days, the markets tend to go up.

Some studies reviewed by Rossi conclude that pre-holiday returns are 23 times higher than returns on normal days. One study done back in the 1990’s found a reliable pre-holiday effect in all three major stock markets in the USA (NYSE, AMEX and NASDAQ), as well as in Japan and the UK.

The prevalence of such an effect indicates, according to Matteo Rossi suggests that it is not down to particular institutional arrangements unique to the stock market of a particular country.

Research in South-East Asia has also uncovered the presence of a ‘Chinese New Year effect’, referring to higher returns on days immediately before and, in some cases, after the Chinese Lunar New Year.

The ‘holiday effect’ has been confirmed in Spain, New Zealand, and Australia. There has even been found to be an Islamic calendar seasonal effect in the stock returns of 12 countries where Muslims make up the majority of the population.

This has been termed a ‘Ramadan return’ and it exceeds the average returns for other months of the Islamic calendar in four Islamic countries.

George Marrett and A. C. Worthington from the University of Wollongong, Australia, in their study of the subject, point out that some research has even shown that the ‘holiday effect’ accounts for some 30 to 50 percent of the total return on the US market in the pre-1987 period.

Their study entitled, ‘An Empirical Note on the Holiday Effect in the Australian Stock Market, 1996-2006’, argues that one explanation for the holiday effect probably lies in investor psychology.

Are investors buying shares before holidays because of ‘high spirits’ and ‘holiday euphoria’?

Their study focused on the Australian stock market confirmed a holiday effect with pre-holiday returns typically five times higher than other days. A small firm effect was also uncovered with pre-holiday returns in small-cap stocks more than ten times higher than other trading days.

The authors of this study conclude that it is very likely that the very strong holiday seasonality found in the retail industry is the main reason for the holiday seasonality in market and the authors believe that at the time of writing these represent unexploited profit opportunities.

Lily Fang, Chunmei Lin and Yuping Shao from the INSEAD and MIT Sloan School of Management, Erasmus University and the National University of Singapore, in another recent paper, document a novel asset pricing pattern: globally, market-wide returns are 0.5 percent to 1 percent lower in the months after major school holidays than other times.

The authors of this study argue this seasonality in stock returns is attributable to investor inattention during holidays resulting in the slow incorporation of negative news.

In this study entitled, ‘School Holidays and Stock Market Seasonality’, the authors point out that it has been widely known among Wall Street traders that September—the month after the summer school holiday—has traditionally been the worst performing month.

The authors point out this “September effect” is striking in magnitude: since 1896, the Dow Jones average return for the month of September has been -1.09 percent, while that of all other months has been +0.75 percent.

The authors point out the persistence of the ‘September effect’ is remarkable: It is the only month that has a negative average return for 20, 50, and 100 years.

These authors argue that stock market returns after major holidays are historically low because during holidays, the market is collectively less attentive to news and as a result, information is incorporated into prices slowly. This effect is particularly strong for negative information because taking advantage of negative news is more difficult and requires more attention, a scarce cognitive resource, than positive news.

It would seem that to take advantage of the holiday effect involves the kind of vigilance during the break requiring investors not taking an actual holiday.

Then again maybe the greatest gift you can give yourself at this time is to take a break from that incessant seizing of opportunities that the rest of the year represents.

But, then again, some canny investing at this time, exploiting the possible 'Holiday Effect' in the markets, could pay for those expensive Christmas Presents...

Bah Humbug!


An empirical note on the holiday effect in the Australian stock market, 1996–2006 GJ Marrett, AC Worthington - Applied Economics Letters, 2009

The efficient market hypothesis and calendar anomalies: a literature review. M Rossi - International Journal of Managerial and Financial Accounting, 2015, Vol. 7, Nos. 3/4, 285-296

School Holidays and Stock Market Seasonality. L Fang, C Lin, Y Shao - Financial Management, 2017