The Web Site of Victor Niederhoffer & Laurel Kenner
Dedicated to the scientific method, free markets, ballyhoo deflation,
value creation, and laughter;
Write to us at: (not clickable)
A seasonatarian suggests that one should break up
day-of-week effects into before the bear market, during the
bear market and after. A reformed seasonatarian, however,
had found that the day-of-week effects when measured by % of
rises had been relatively constant. Neither had used
futures. We bit our tongue but finally ... we cannot refrain
from reprinting an excerpt from our March 20, 2003 article
on MSN Money (thanks to Dr. Alex Castaldo for reminding us):
Seasonality and changing cycles, by Victor Niederhoffer and Laurel Kenner
A good part of the anomaly literature is devoted to studies of seasonality. A basic problem with these studies is that merely picking a season to study
involves making guesses as to when and where the seasonality is. For example, is it in January or December, on Monday or Friday, in the United States or the
Ukraine? (Yes, our Google search turned up a study of anomalies in the Ukraine.)
Thus, the very choice of a subject might involve random luck.
Another aspect of seasonality studies that must be considered is whether the effects noted are sufficient to cover transaction costs. A retrospective study
showing that you can make 2 cents more on Friday trades than Monday trades in your typical $50 stock would not be sufficient in practice to leave anyone but the broker and the market-maker richer.
Thus, it s essential to temper the conclusions of such studies with out-of-sample testing -- in other words, with real trading.
With that in mind, let s consider a representative seasonality study, The Day of the Week Effect and Stock Market Volatility: Evidence From Developed
Countries, by Halil Kiymaz and Hakan Berument, from the Summer 2001 edition of the Journal of Economics and Finance. Their research examines whether returns and variability differ on different days of the week in the five major international markets from 1989 to October 1997. They conclude that day-of-week anomalies exist for returns and volatility in all five countries.
For example, they find that in the United States, stocks go down an average of -0.08% on Monday, while rising on Fridays an average of 0.1%. But hold all tickets -- 0.1% on a $50 stock is just 5 cents, hardly enough to cover transaction costs even if the results hold up.
Regime shift possibility noted: 0
Fortunately, the Spec Duo has the pencils and envelopes necessary to update the study. Here is what we found for the daily changes and volatility for the S&P 500 Index on the different days of the week from the beginning of 1997 to March 15, 2003:
Returns and volatility by day of the week, in percent: