Holiday market stock
Stock markets around the world exhibit significantly higher than average returns on the trading days preceding holidays. Stocks advance with disproportionate frequency on pre-holiday trading days. The pre-holiday return is 5.5 times larger than the daily return on other days, on average, across the 17 (non-US) countries in our sample for the period 1980-1994. The largest difference is found in the Canadian stock market, and the Netherlands is the only country where pre-holiday returns are lower than the average return. These results are consistent with the results found for the US stock market.
The evidence on the holiday effect of international stock markets is particularly surprising when the markets in different characteristics. They differ in four aspects: total market capitalization; the number of companies listed; the market capitalization to GDP ratios; and the average company size in each market.
The markets differ substantially in terms of capitalization and, therefore, liquidity. For example, the difference in market capitalization between Japan and Chile is large (more than $ 3.6 trillion), but most of the results found in this paper apply to both markets. The number of companies listed in the market also varies widely, although 9 out of 17 have less than 500. There are also significant differences across the countries in terms of the relative importance of the equity markets in their respective economies. In 1990, for example, the Gross Domestic Product (GDP) in Asian countries like Malaysia, Hong Kong, Japan and Singapore was very similar to the market capitalization of those respective equity markets. In that same year, however, the equity markets in countries like Germany, Italy, Mexico and Spain represented around 22%, on average of GDP in those countries. The differences in the ratios of market capitalization to GDP for the countries grew significantly between 1990 and 1995. However, the large differences across the stock markets make the task of explaining the existence of the holiday effect more difficult.
One explanation offered for the holiday effect is that investors cover short positions before the holiday on the presumption that the probability of the release of adverse news is greater over the holiday because of the extended market closure. The release of news may be asymmetric because companies prefer to reveal adverse information when the market is scheduled to be closed to give market participants time to digest the information and, thereby, avoid overreaction. Interestingly, there are a number of markets in which participants are forbidden to sell short, casting doubt on this explanation. For instance, the Mexican and the Chilean markets both forbid short selling during the period of analysis, yet still exhibit a significant holiday effect. The British stock market, on the hand, allows short selling of stocks but does not exhibit this calendar anomaly.
One influence on the existence of the holiday effect across international markets is the common global market factor in returns attributable to the increasing integration of capital markets.
The stock market is scheduled to open from 9 :30 AM to 4 PM Monday through Friday, except for holidays. It used to be open on Saturdays before May 26, 1952. The market may occasionally close because of an extreme snow storm or the funeral of a former U.S. President, but it is rare. From 1991 through 1999, the stock market was open for trading 252, 253 or 254 days, depending on the calendar. On average the stock market was open for trading 252.7778 days a year.
The stock market is regularly closed for holidays nine weekdays a year-New Years Day, Martin Luther King, Jr.Day, Washingtons Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Martin Luther King, Jr. Day, Washington Birthday and Memorial Day are celebrated on the third Mondays in January, February and May, respectively. When any holiday falls on a Saturday, the market is closed on the preceding Friday. When any holiday falls on a Sunday, the market is closed on the succeeding Monday.
Arthur A.Merrill, CMT, pioneered the study of seasonal behavior of stock market prices in his classic book, Behavior of Prices on Wall Street. Merrill found that the market has a strong tendency to rise the day before most holidays. On average, the DJIA has been up a statistically highly significant 68% of the time the day before a holiday. The best days (up 81% to 72% of the time) were the day before Labor Day, Independence Day, Memorial Day, Christmas Day and New Years Day, in that order.
The day before Good Friday and the day before Thanksgiving, however, were only slightly better than average and were, therefore, not significant statistically. There is insufficient data to make any conclusions about market behavior around the newest holiday, Martin Luther King, Jr. Day.
A glaring exception to the bullish holiday rule-the trading day before Presidents Day in February-was actually down slightly more often than not. The day after Presidents Day was up only 40% of the time. Also, the day after Independence Day was up 60% of the time.
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