Calendar anomalies in the stock market refer to patterns where stock returns deviate from expected behavior based on the time of year, month, or even day. Well-documented anomalies include the “Sell in May and Go Away” strategy, which suggests that stocks underperform during the summer months, and the “Turn-of-the-Month Effect,” where returns are typically higher in the last few days of one month and the first few days of the next.
Reference [1] introduced a novel calendar anomaly known as the end-of-month reversal effect. The study showed that end-of-month returns, i.e. returns from the fourth Friday to the last trading day of the month, are negatively correlated with returns in the following month. The author pointed out,
This paper documents a novel 1-month aggregate market reversal pattern. This pattern is driven by the previous end-of-the-moth market return. The empirical evidence is statistically significant both In- and Out-of-Sample. Importantly, I show that the reversal at the aggregate level has characteristics opposite to those established in the cross-sectional literature: it concentrates on high-priced and liquid stocks and is cyclical with the economy. Consequently, a simple rule of thumb and more sophisticated strategies deliver sizable economic gains.
In short, a simple trading strategy based on this effect, that is buying if the end-of-month return is negative and selling if it is positive, outperforms the buy-and-hold strategy over a 45-year period.
The author also provides an explanation for this anomaly, attributing it to pension funds’ liquidity trading, as they adjust their portfolios to meet pension payment obligations.
I rationalize the empirical findings via pension funds’ end-of-the-month liquidity trading. Leveraging on recent findings and on direct evidence from daily pension funds trading activity, I argue that the payment cycle potentially triggers a non-informational trading shock. Consistent with a payment cycle explanation, I show that the reversal pattern increases in absolute terms within the one month ahead, aligning with the time pension funds receive inflows.
Let us know what you think in the comments below or in the discussion forum.
References
[1] Graziani, Giuliano, Time Series Reversal: An End-of-the-Month Perspective, 2024, https://ssrn.com/abstract=4349253
Further questions
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
Hedge funds run by proteges of the late Julian Robertson beat the broader equity markets in January, shrugging off gyrations sparked by the emergence of Chinese AI upstart DeepSeek and threats of tariffs.
