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The Halloween Stock Market Indicator – Guide Notes

October 31, 2014

In 1694, the Bank of England was founded by Act of Parliament, with the original purpose of  acting as the Government’s banker and debt-manager. 1694 was also the year that the French Enlightenment writer and philosopher, Francois-Marie Arouet, better known as Voltaire, was born.

It is also the year from which we can be trace the so-called ‘Halloween Effect’.  This is the effect seminally confirmed in the leading academic journal, the American Economic Review, in 2002, by researchers  Sven Bouman and Ben Jacobsen. In a paper titled, ‘The Halloween Indicator, Sell in May and Go Away: Another Puzzle’, they test the hypothesis that stock market returns tend to be significantly higher in the November-April period than in the May-October period and find it to be true in 36 of the 37 developed and emerging markets studied in their sample between 1973 and 1998, though it can be observed in their UK data back to 1694. They further find the effect is particularly pronounced in the countries of Europe and that it persists over time. The puzzle was especially noteworthy because the anomaly has been widely recognised for years, though not previously rigorously tested, yet it still persists.

Some analysts trace this back to the practice of the landed classes of selling off stocks in May of each year as they headed to their country estates for the summer months, and re-investing later in the year. Times have moved on, but summer vacations and attitudes may have not. That’s a theory, at least, but a strange one to explain modern-day investment strategies if true.

In a bigger follow-up study by Jacobsen now working with finance professor, Cherry Yi Zhang, published in 2012,  they looked at 108 countries, using over 55,000 observations, including more than 300 years of UK data. And guess what! They found that the effect is confirmed for 81 of the 108 countries, with the post-Halloween returns out-performing the pre-Halloween period returns by 4.52 per cent on average, and by 6.25 per cent over the past 50 years looked at alone.

Strange but true! The Halloween Indicator seems to be working better than ever.

So let’s say it’s Halloween today. Time to get stuck into the stock market? You decide!

Reading and Links

Boumen, S. and Jacobsen, B. (2002). The Halloween Indicator: “Sell in May and Go Away”: Another Puzzle. American Economic Review, 92, 5. 1618-1635.

Click to access HalloweenIndicator.pdf

Calendar Effects. Wikipedia.

Market anomaly. Wikipedia.

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