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Why investors should not be cautious about the academic approach to testing for stock market anomalies

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  • Brian Lucey
  • Angel Pardo

Abstract

The ability of investors to implement seasonal strategies implied by academic papers has been widely criticized, most recently by Hudson et al. (Applied Financial Economics, 12, 681-86, 2002). This paper addresses these concerns, and provides an example of a strategy derived from academic papers that indicates how and to what profitability such a strategy can be implemented. In particular, the pre-holiday anomaly is examined, where returns tend to be higher on the day before a holiday. After checking that the pre-holiday return compensates market frictions, the existence and the changing nature of such anomaly is tested. Finally, the profitability of the pre-holiday trading strategy in an out-of-the-sample period is assessed by checking that the pre-holiday profit is clearly different from the result an investor would obtain on a set of randomly selected days. This evidence is provided for three large stocks and an index in two different markets, Spain and Ireland.

Suggested Citation

  • Brian Lucey & Angel Pardo, 2005. "Why investors should not be cautious about the academic approach to testing for stock market anomalies," Applied Financial Economics, Taylor & Francis Journals, vol. 15(3), pages 165-171.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:3:p:165-171
    DOI: 10.1080/0960310042000313213
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    References listed on IDEAS

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    1. Robert Hudson & Kevin Keasey & Kevin Littler, 2002. "Why investors should be cautious of the academic approach to testing for stock market anomalies," Applied Financial Economics, Taylor & Francis Journals, vol. 12(9), pages 681-686.
    2. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, June.
    3. Schwert, G. William, 2003. "Anomalies and market efficiency," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 15, pages 939-974, Elsevier.
    4. Meneu, Vicente & Pardo, Angel, 2004. "Pre-holiday effect, large trades and small investor behaviour," Journal of Empirical Finance, Elsevier, vol. 11(2), pages 231-246, March.
    5. Paul Brockman & David Michayluk, 1998. "The persistent holiday effect: additional evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 5(4), pages 205-209.
    6. Chien, Chin-Chen & Lee, Cheng-few & Wang, Andrew M. L., 2002. "A note on stock market seasonality: The impact of stock price volatility on the application of dummy variable regression model," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 155-162.
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    Cited by:

    1. Razvan STEFANESCU & Ramona DUMITRIU, 2018. "Changes in the stocks prices behavior before and after the public holidays: case of Bucharest Stock Exchange," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 189-202.
    2. Ramona DUMITRIU & Razvan STEFANESCU, 2017. "The Behavior of Stock Prices during Lent and Advent," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 95-112.
    3. Qadan, Mahmoud & Kliger, Doron, 2016. "The short trading day anomaly," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 62-80.
    4. Auer, Benjamin R. & Rottmann, Horst, 2014. "Is there a Friday the 13th effect in emerging Asian stock markets?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 1(C), pages 17-26.
    5. Wessel Marquering & Johan Nisser & Toni Valla, 2006. "Disappearing anomalies: a dynamic analysis of the persistence of anomalies," Applied Financial Economics, Taylor & Francis Journals, vol. 16(4), pages 291-302.
    6. Auer, Benjamin R., 2014. "Daily seasonality in crude oil returns and volatilities," Energy Economics, Elsevier, vol. 43(C), pages 82-88.
    7. Dumitriu, Ramona & Stefanescu, Răzvan, 2019. "The extended Friday the 13th Effect in the US stock returns," MPRA Paper 95296, University Library of Munich, Germany, revised 22 Jul 2019.
    8. Paulo M. Gama & Elisabete F. S. Vieira, 2013. "Another look at the holiday effect," Applied Financial Economics, Taylor & Francis Journals, vol. 23(20), pages 1623-1633, October.
    9. Ramona DUMITRIU & Razvan STEFANESCU, 2017. "The Behavior of Stock Prices during Lent and Advent," Proceedings RCE 2017, Editura Lumen, vol. 0, pages 95-112, November.
    10. Paul McGuinness, 2005. "A re-examination of the holiday effect in stock returns: the case of Hong Kong," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1107-1123.
    11. Tantisantiwong, Nongnuch & Halari, Anwar & Helliar, Christine & Power, David, 2018. "East meets West: When the Islamic and Gregorian calendars coincide," The British Accounting Review, Elsevier, vol. 50(4), pages 402-424.
    12. Bernhard Zwergel, 2010. "On the exploitability of the turn-of-the-month effect-an international perspective," Applied Financial Economics, Taylor & Francis Journals, vol. 20(11), pages 911-922.
    13. Sania Wadud & Robert D. Durand & Marc Gronwald, 2021. "Connectedness between the Crude Oil Futures and Equity Markets during the Pre- and Post-Financialisation Eras," CESifo Working Paper Series 9202, CESifo.

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