Equity Returns at the Turn of the Month

The turn-of-the-month effect in U.S. equities is found to be so powerful in the 1926–2005 period that, on average, investors received no reward for bearing market risk except at turns of the month. The effect is not confined to small-capitalization or low-price stocks, to calendar year-ends or quarter-ends, or to the United States: This study finds that it occurs in 31 of the 35 countries examined. Furthermore, it is not caused by month-end buying pressure as measured by trading volume or net flows to equity funds. This persistent peculiarity in returns remains a puzzle in search of an answer.See comments and response on this article.Using the DJIA and the S&P 500 Index, prior studies have reported a turn-of-the-month effect in equity returns so prominent that equity returns, on average, are significantly higher at the four-day turn of the month than over other days. We examine this effect in detail. Using CRSP daily returns for the 80-year period of 1926–2005, we found the average daily value-weighted (equal-weighted) U.S. equity market return over the four-day turn of the month to be 0.15 percent (0.22 percent). In comparison, the average daily value-weighted (equal-weighted) market return over the other 16 trading days of the month was found to be –0.001 percent (0.04 percent). This pattern is present in various subperiods, including the two most recent decades. Furthermore, this pattern is not confined to small-capitalization or low-price stocks; it is not confined to calendar quarter-ends or year-ends; it is not the result of higher risk at the turn of the month as measured by standard deviation of returns; and it is not confined to the United States—it occurs in 31 of the 35 countries that we examined. We also examined the proposal that the pattern is the result of a “regularity in payment dates” in which the flow of funds into the market at turns of the month push up stock prices. We found no evidence, however, that trading volume or net flows to equity mutual funds are higher at turns of the month than over other days. In the end, we concluded that the turn-of-the-month pattern in equity returns remains a puzzle in search of an answer.