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OR Practice—Playing the Turn-of-the-Year Effect with Index Futures

Author

Listed:
  • Ross Clark

    (Midland Doherty Limited, Vancouver, British Columbia)

  • William T. Ziemba

    (University of British Columbia, Vancouver, British Columbia)

Abstract

The “turn-of-the-year” effect is a well-documented stock market phenomenon in which low capitalization “small stocks” receive relatively higher returns than high capitalization “big stocks” on the last trading day of December and the first 8 trading days of January. The difference in returns during this period is of the order of 10%. Strategies for buying and selling these small stocks may be profitable, but may also incur large transaction costs that eliminate most or all of the projected gains. In this paper, we show a preferable way to invest in order to exploit this anomaly: use a futures spread that is long in the small stocks and short in the big stocks. The optimal investment, which uses a modification of the capital growth criterion, is large and has a substantial expected gain with minimal risk. We have used this analysis successfully in managing investment accounts.

Suggested Citation

  • Ross Clark & William T. Ziemba, 1987. "OR Practice—Playing the Turn-of-the-Year Effect with Index Futures," Operations Research, INFORMS, vol. 35(6), pages 799-813, December.
    • Handle: RePEc:inm:oropre:v:35:y:1987:i:6:p:799-813
    DOI: 10.1287/opre.35.6.799
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    Cited by:

    1. Niels Wesselhöfft & Wolfgang K. Härdle, 2020. "Risk-Constrained Kelly Portfolios Under Alpha-Stable Laws," Computational Economics, Springer;Society for Computational Economics, vol. 55(3), pages 801-826, March.
    2. Stefanescu, Răzvan & Dumitriu, Ramona, 2020. "Introducere în analiza anomaliilor calendaristice, Partea a doua [An Introduction to the Analysis of the Calendar Anomalies, Part 2]," MPRA Paper 97961, University Library of Munich, Germany.
    3. Tangakou Soh Robert & Mba Fokwa Arsene, 2015. "Banking Services and Investments in Cameroon: An Approach by the ARDL Method," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 3(4), pages 80-93, December.
    4. John Board & Charles Sutcliffe & William T. Ziemba, 2003. "Applying Operations Research Techniques to Financial Markets," Interfaces, INFORMS, vol. 33(2), pages 12-24, April.
    5. Edwin D. Maberly & Daniel F. Waggoner, 2000. "Closing the question on the continuation of turn-of-the-month effects: evidence from the S&P 500 Index futures contract," FRB Atlanta Working Paper 2000-11, Federal Reserve Bank of Atlanta.

    More about this item

    Keywords

    197; 213 turn-of-the-year effect;

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