Nonsecular Regularities in Returns and Volume

This study addressed U.S. stock daily returns and volume around days when the market is open that correspond to religious or cultural occasions—specifically, St. Patrick's Day and the Jewish High Holy Days of Rosh Hashanah and Yom Kippur. On Rosh Hashanah and Yom Kippur, volume was found to be down relative to volume on all trading days in the sample. The reason may be that the nonfinancial opportunity cost of trading is high for a considerable number of traders on these days. Returns were significantly higher on the days preceding St. Patrick's Day and Rosh Hashanah, which is consistent with the notion that market returns reflect the festive nature of these occasions. Evidence was also found of significantly negative returns after Yom Kippur in the second half of the sample period, which accords with the idea that the market reflects the solemn nature of this occasion. Overall, the results are consistent with the view that “mood” is a viable explanation for some market movements. Past analyses of stock return behavior found economically and statistically higher returns on days preceding holidays on which the equity market is closed than on other trading days. Possible reasons include speculators wanting to cover short positions before closed-market days and positive sentiment before a festive occasion. The issue of whether it is the closed market or the nature of the impending occasion (e.g., Christmas) that causes the anomalous return patterns has not been addressed. Thus, we proposed to examine what happens to the U.S. equity market before, during, and after a religious or cultural occasion on which the market stays open. We considered how returns and volume behaved on the days of and surrounding St. Patrick's Day, Rosh Hashanah, and Yom Kippur in the years 1946–2000.We found that on both Rosh Hashanah and Yom Kippur, volume (proxied by the NYSE) was down relative to volume on all days in the period, indicating that the nonfinancial opportunity cost of trading is high for many investors on those days. Indeed, in the 1946–2000 period, the median decrease in volume on Rosh Hashanah relative to the preceding trading day was about 19 percent; the corresponding number for Yom Kippur was about 24 percent.We also found that returns (proxied by the S&P 500 Index) were significantly higher on the days preceding St. Patrick's Day and Rosh Hashanah, which is consistent with the notion that market returns reflect the festive mood of investors on these occasions. We found significantly negative returns after Yom Kippur in the second half of our sample period (1973–2000), which accords with the idea that the market reflects the solemn nature of this occasion.The absolute average returns surrounding all three occasions were large relative to the overall mean return of the market. For example, during the full sample period, the average S&P 500 return on the two days preceding Rosh Hashanah was 13 times the average return on this index for the entire sample and the average absolute return on Yom Kippur was about 6 times the index mean return. Thus, our study throws light on the notion that nonfinancial opportunity costs are an important source of variation in trading activity.The anticipatory effects on returns of the festive occasions, St. Patrick's Day and Rosh Hashanah, were strong. The price pattern before these days indicates that people look forward to these uplifting occasions, which is reflected in their trading. We propose that optimism and/or increased investor confidence (and, consequently, decreased risk aversion) accompany these festive occasions and can be seen in increased buying of risky assets, with a concomitant run-up in prices.Overall, our results are consistent with the view that “mood” is a viable explanation for some market movements. Our results have implications for practitioners who wish to forecast trading activity (and, in turn, liquidity) as well as returns.